Kaival Brands Innovations Group, Inc 10-K for FY2023
Kaival Brands Innovations Group, Inc. (KAVL)
About this 10-K
Kaival Brands Innovations Group, Inc filed this 10-K on February 14, 2024, covering the fiscal year ended October 31, 2023 (FY2023).
Headline figures
Fiscal year ended October 31, 2023, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $13.09M
- up 2.6% from $12.76M a year earlier
- Net loss
- $11.13M
- compared with a net loss of $14.37M a year earlier
- Diluted EPS
- -$4.13
- compared with -$7.60 a year earlier
UNITED STATES
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DOCUMENTS INCORPORATED BY REFERENCE
None.
KAIVAL BRANDS INNOVATIONS GROUP, INC.
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED OCTOBER 31, 2023
TABLE OF CONTENTS
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain statements and information included in this Annual Report on Form 10-K for the year ended October 31, 2023 (this “Report”) contain or may contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), Section 21 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Private Securities Litigation Reform Act of 1995. We generally use the words “may,” “should,” “believe,” “expect,” “intend,” “plan,” “anticipate,” “likely,” “estimate,” “potential,” “continue,” “will,” and similar expressions to identify forward-looking statements. Forward-looking statements are not statements of historical facts, but rather reflect our current expectations concerning future events and results, including, without limitation, statements related to:
| ● | our substantial reliance on, and efforts to diversify our business from, the business of our affiliate Bidi Vapor, LLC (“Bidi”); | |
| ● | our ability to raise required funding in the form of debt or equity both in the near and longer term; | |
| ● | our ability to obtain from, and pay for, Bidi products we distribute; | |
| ● | our ability to integrate and ultimately enter into licenses for or create products relating to the intellectual property assets we acquired from GoFire, Inc. on May 30, 2023; | |
| ● | the impact of the August 2022 11th Circuit Court of Appeals decision overturning the U.S. Food and Drug Administration’s (“FDA”) previous denial of Bidi’s Premarket Tobacco Product Application (“PMTA”) for its non-tobacco flavored BIDI® Stick electronic nicotine delivery system (“ENDS”), which we are permitted to distribute in the U.S. subject to FDA enforcement and maintenance of all state licenses and permits, and the outcome of the FDA’s pending review of such PMTA, the denial of which could have a substantial adverse impact on our company; | |
| ● | the impact of the FDA’s marketing denial order (“MDO”) in January 2024 regarding the Classic BIDI® Stick tobacco-flavored ENDS product, which has the potential to have a substantial adverse impact on our company; | |
| ● | the outcome of Bidi Vapor’s petition with the 11th Circuit Court of Appeals regarding the January 2024 MDO related to Classic BIDI® Stick; | |
| ● | our substantial reliance on QuikfillRx, LLC (now known as Kaival Marketing Services) to provide key sales, marketing and other support services to us; | |
| ● | our relationship with, and the results of marketing and sales activity by, Phillip Morris International, to whom we have licensed international rights to distribute Bidi products and from who we are entitled to receive royalty payments; | |
| ● | the influence on our company of Kaival Holdings, LLC, our majority shareholder which is controlled by Nirajkumar Patel, our Chief Science and Regulatory Officer and a director of our company, and the potential for conflicts of interests between Kaival Holdings and our company and our minority stockholders; |
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| ● | our relationships with, and reliance on, third party distributors and brokers to arrange for sales of our products; | |
| ● | the market perception of Bidi products we distribute and related impacts on our reputation; | |
| ● | the impact of black-market goods on our business; | |
| ● | the demand for Bidi products we distribute; | |
| ● | anticipated product performance, and our market and industry expectations; | |
| ● | our ability or plans to diversify our product offerings; | |
| ● | the impact of government regulation, laws or consumer preferences generally, or changes thereto, that could affect our business; and | |
| ● | circumstances or developments that may make us unable to implement or realize the anticipated benefits, or that may increase the costs of, our current and planned business initiatives, including matters over which we have little or no control such as COVID-19. |
Forward-looking statements, including those concerning our expectations, involve significant risks, uncertainties and other factors, some of which are beyond our control, which may cause our actual results, performance, or achievements, or industry results to be materially different from any future results, performance, or achievements expressed or implied by such forward-looking statements. See the “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operation” sections contained in this Report for a listing of some of the factors that could cause the results anticipated by our forward-looking statements to differ from actual future results. Except as required by applicable law, including the securities laws of the United States, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. You are cautioned not to unduly rely on such forward-looking statements when evaluating the information presented in this Report.
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PART I
Item 1. Business.
As used in this Report, the terms “we,” “us,” “our,” the “Company,” and “Kaival” refer to Kaival Brands Innovations Group, Inc., a Delaware corporation, unless otherwise indicated. The term “Common Stock” means our common stock, par value $0.001 per share.
Unless the context specifically requires otherwise, all historical share and per-share amounts reflected in our consolidated financial statements and other financial information contained in this Report are presented to reflect a 1-for-21 reverse stock split of our Common Stock which became effective for legal and accounting purposes on January 22, 2024 as if such split occurred as of the earliest period presented.
Overview
We are engaged in the sale, marketing and distribution of electronic nicotine delivery system (“ENDS”) products, also known as “e-cigarettes”, in a variety of favors. Our primary product is the Bidi® Stick as well as other products manufactured by our affiliate Bidi Vapor LLC (“Bidi”). We hold the exclusive worldwide right to market and distribute the Bidi® Stick and certain other products manufactured by Bidi. Our current revenue generating activities are focused on driving sales growth of the BIDI® Stick, primarily through wholesale and traditional retail channels, including convenience stores. Along with our affiliate Bidi, which bears the bulk of the responsibility for U.S. Food and Drug Administration (“FDA”) and other regulatory matters relating to its products, we are committed to steadfast compliance with established FDA requirements regarding the use of our products.
At the same time, as the FDA regulatory landscape and PMTA-related enforcement continues to evolve, we have faced challenges and industry-wide headwinds, which we are continuing to navigate by pursuing new revenue opportunities by diversifying our platform through the distribution, development, and subsequent scaling of other nicotine and non-nicotine products. An important goal for our company is to leverage our existing presence with our sales channels to establish an efficient platform from which to create shareholder value by developing and growing current and potentially new business lines, revenues and, ultimately, positive cash flows and profitability.
Business Strategy
In addition to our focus on driving revenue through distribution of the BIDI® Stick, we intend to build our revenue by executing key internal strategic initiatives. Accomplishing these financial goals will depend on a number of factors including our ability to execute these strategies. Representative key initiatives include:
| ● | Maximizing the core business: |
| ● | Continuing the growth and management of strategic alliances with market leaders within dense, established e-cigarette markets; |
| ● | Development of internal national account sales team to drive new revenue opportunities and manage key strategic third-party vendor and broker alliances to maximize targeted market penetration; |
| ● | Search for high-caliber, experienced talent that create impact and add value to our organization quickly; |
| ● | Effective financial management and capital planning: |
| ● | Establishing an efficient, scalable organizational infrastructure to support our expected growth and diversification; |
| ● | Improving overall business processes to deliver greater value to our customers; |
| ● | Data-driven product innovation and strategic expansion: |
| ● | Investing in our core organizational capabilities to provide diversified, revenue generative opportunities both through our existing distribution network and beyond; |
| ● | Further development of internal data processes to drive growth and diversification efforts; |
| ● | Pursuing third-party licensing opportunities through our vaporization and inhalation-related intellectual property portfolio which we acquired from GoFire Inc. in May 2023; |
| ● | During 2024 and beyond, we plan on exploring strategic acquisition and collaboration arrangements that generate revenue, positive cash flows and profitable operations in order to expand the scale of our company by capitalizing on our traditional retail outlet other other distribution relationships. |
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We will continue to align ourselves with progressive, proven, performance-based partners, which may include the development and expansion of key financial services relationships as we seek to diversify through data-driven decisions.
Description of Business Segments & Key Agreements
Bidi Vapor, LLC Distribution Agreement
On March 9, 2020, we entered into an exclusive distribution agreement (the “Distribution Agreement”) with our affiliate Bidi, which Distribution Agreement was amended and restated on May 21, 2020, April 20, 2021, on June 10, 2022, and on November 17, 2022 (collectively, the “A&R Distribution Agreement”). Pursuant to the A&R Distribution Agreement, Bidi granted us an exclusive worldwide right to distribute Bidi’s ENDS (as more particularly set forth in the A&R Distribution Agreement) for sale and resale to both retail level customers and non-retail level customers. Currently, the products consist solely of the “BIDI® Stick,” Bidi’s disposable, tamper resistant ENDS product made with medical-grade components, a UL-certified battery and technology designed to deliver a consistent vaping experience for adult smokers 21 and over. We presently distribute products to wholesalers and retailers of ENDS products, having ceased all direct-to-consumer sales in February 2021. Nirajkumar Patel, our Chief Science and Regulatory Officer and director and an indirect controlling shareholder of our company, owns Bidi.
BIDI® Stick comes in a variety of flavor options for adult cigarette smokers. We do not manufacture any of the products we resell. The BIDI® Stick is manufactured by Bidi. Pursuant to the terms of the A&R Distribution Agreement, Bidi provides us with all branding, logos, and marketing materials to use with our commercial partners in connection with our marketing and promotion of Bidi products.
The A&R Distribution Agreement extends the previous one-year, annual renewable term to an initial term of ten years, which automatically renews for another ten-year term if we satisfy certain minimum purchase thresholds. The A&R Distribution Agreement also provides us with a right of first refusal in the event Bidi receives an offer that would constitute a “change of control transaction,” as well as a right of first refusal to act as the exclusive distributor of any and all future products of Bidi that arise out of or related to ENDS and components related to ENDS, or arise out of or related to the tobacco-derived nicotine industry.
In connection with the A&R Distribution Agreement, we 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 sub-distribution agreements, as amended and restated, are collectively referred to as the “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 products in such quantities as they should need to properly service non-retail customers within the continental United States (the “Territory”).
We process all sales made to non-retail customers, with all sales to non-retail customers made through Bidi’s age-restricted website, www.wholesale.bidivapor.com. We ceased all direct-to-consumer sales in February 2021 in order to better ensure youth access prevention and to comply with the Prevent All Cigarette Trafficking Act (known as the PACT Act). We provide all customer service and support at our own expense. We set the minimum prices for all sales made by us. We maintain adequate inventory levels of products in order to meet the demands of our non-retail customers and deliver products sold to these customers.
A key third party collaborator of ours is QuikfillRx, a Florida limited liability company which does business as “Kaival Marketing Services” to reflect its contributions to our company. QuikfillRx provides us with certain services and support relating to sales management, website development and design, graphics, content, social media, management and analytics, and market and other research. QuikfillRx provides these services to us pursuant to a Services Agreement, most recently amended on November 9, 2022, which has a current term ending on October 31, 2025 (subject to potential one-year extensions) and pursuant to which QuikfillRx receives monthly cash compensation and was granted certain equity compensation in the form of options.
Kaival Labs, Inc. & Kaival Brands International, LLC.
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On August 31, 2020, we formed Kaival Labs, Inc., a Delaware corporation (herein referred to as “Kaival Labs”), as a wholly owned subsidiary for the purpose of developing our own branded and white-label products and services, of which none has commenced as of the date of this Report. We have not yet launched any Kaival-branded products, nor has it begun to provide white label wholesale solutions for other product manufacturers.
We have, and may continue to, utilize Kaival Labs to acquire or license complimentary businesses or assets. On May 30, 2023, through Kaival Labs, we acquired certain vaporization and inhalation-related intellectual property from GoFire, Inc. (“GoFire”) in exchange for equity securities for our company and contingent cash consideration. The goal of this acquisition is to diversify our product offerings and create near and longer-term revenue opportunities in the form of potential licenses for the acquired technology and our development of new products based on the purchased assets. In the near term, we expect to seek third-party licensing opportunities in the cannabis, hemp/CBD, nicotine and nutraceutical markets. Longer term, we believe we can utilize the purchased assets to create innovative and market-disruptive products, including patent protected vaporizer devices and related hardware and software applications. No assurances can be given, however, that the GoFire assets will generate revenue for us in the future or otherwise create the value for our company that we anticipate.
On March 11, 2022, we formed Kaival Brands International, LLC, a Delaware limited liability company (herein referred to as “KBI”), as a wholly owned subsidiary for the purpose of entering into an international licensing agreement with Philip Morris Products S.A. (“PMPSA”), a wholly owned affiliate of Philip Morris International Inc. (“PMI”), as described further below.
FDA PMTA and MDO Determinations, Related Court Actions and the Impact on Our Business
Non-Tobacco Flavored BIDI® Sticks
In September 2021, in connection with the Bidi’s Premarket Tobacco Product Application (“PMTA”) process for BIDI® Stick, the U.S. Food and Drug Administration (“FDA”) effectively “banned” non-tobacco flavored ENDS by denying nearly all then-pending PMTAs for such products (including Bidi’s). Following the issuance by the FDA of a related Marketing Denial Order (“MDO”) regarding these ENDS products, manufacturers were required to stop selling non-tobacco flavored ENDS products. Bidi, along with nearly every other company in the ENDS industry, received a MDO for its non-tobacco flavored ENDS products. With respect to Bidi, the MDO covered all non-tobacco flavored BIDI® Sticks, including its Arctic (menthol) BIDI® Stick. As a result, beginning in September 2021, Bidi pursued multiple avenues to challenge the MDO. First, on September 21, 2021, separate from the judicial appeal of the MDO in its entirety, Bidi filed a 21 C.F.R. §10.75 internal FDA supervisory review request specifically of the decision to include the Arctic (menthol) BIDI® Stick in the MDO. In May 2022, the FDA issued a determination that it views the Arctic BIDI® Stick as a non-tobacco flavored ENDS product, and not strictly a menthol flavored product.
On September 29, 2021, Bidi petitioned the U.S. Court of Appeals for the Eleventh Circuit (or the 11th Circuit) to review the FDA’s denial of the PMTAs for its non-tobacco flavored BIDI® Stick ENDS (including the Arctic BIDI® Stick), arguing that it was arbitrary and capricious under the Administrative Procedure Act (or the 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 (or 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 non-tobacco flavored products compared to tobacco-flavored ENDS products, and that the FDA should have gone through the notice and comment rulemaking process for this requirement.
On August 23, 2022, the 11th Circuit set aside (i.e., vacated) the MDO issued to the non-tobacco flavored BIDI® Sticks and remanded Bidi’s PMTA back to the FDA for further review. Specifically, the 11th Circuit held that the MDO was “arbitrary and capricious” in violation of the APA because the FDA failed to consider the relevant evidence before it, specifically Bidi’s aggressive and comprehensive marketing and sales-access-restrictions plans designed to prevent youth appeal and access.
The 11th Circuit’s opinion further indicated that the FDA did not properly review the data and evidence that it has long made clear are critical to the “appropriate for the protection of the public health” standard for PMTAs set forth in the Tobacco Control Act including, in Bidi’s case, “product information, scientific safety testing, literature reviews, consumer insight surveys, and details about our company’s youth access prevention measures, distribution channels, and adult-focused marketing practices,” which “target only existing adult vapor product users, including current adult smokers,” as well as our retailer monitoring program and state-of-the-art anti-counterfeit authentication system. Because a MDO must be based on a consideration of the relevant factors, such as the marketing and sales-access-restrictions plans, the denial order was deemed arbitrary and capricious, and vacated by the FDA.
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The FDA did not appeal to the 11th Circuit’s decision. The FDA had until October 7, 2022 (45 days from the August 23, 2022 decision) to either request a panel rehearing or a rehearing “en banc” (a review by the entire 11th Circuit, not just the 3-judge panel that issued the decision), and until November 21, 2022 (90 days after the decision) to seek review of the decision by the U.S. Supreme Court. No request for a rehearing was filed, and no petition for a writ of certiorari was made to the Supreme Court.
In light of the 11th Circuit decision, we have had the continued ability to market and sell the non-tobacco flavored BIDI® Sticks, subject to the FDA’s enforcement discretion, for the duration of the PMTA scientific review. The FDA has indicated that it is prioritizing enforcement of unauthorized ENDS against companies (1) that never submitted PMTAs, (2) whose PMTAs have been refused acceptance or filing by the FDA, (3) whose PMTAs remain subject to MDOs, and (4) that are continuing to market unauthorized synthetic nicotine products after the July 13, 2022 cutoff. As none of these scenarios apply to Bidi, we believe the current risk of FDA enforcement is low.
Since the PMTA was remanded, Bidi has continued to update its application with the results of new studies, including a nationwide population prevalence study on the BIDI® Stick that is currently undergoing peer review for publication.
Classic BIDI® Stick
Separately, on or about May 13, 2022, the FDA placed the tobacco-flavored Classic BIDI® Stick into the final Phase III scientific review, and in September 2022 completed a remote regulatory assessment of Bidi and its contract manufacturer in China, SMISS Technology Co. LTD, in relation to the pending PMTA for the Classic BIDI® Stick.
On March 20, 2023 Bidi received its anticipated deficiency letter for the Classic BIDI® Stick PMTA, outlining FDA’s remaining scientific questions. On June 18, 2023, Bidi, provided a timely, comprehensive response to the FDA’s deficiency letter.
On January 22, 2024, FDA issued a MDO for the Classic BIDI® Stick. While this development precludes us from marketing the Classic BIDI® Stick, which could have a material adverse affect on our company, the FDA’s decision does not involve the ten PMTAs for Bidi Vapor’s non-tobacco flavored devices described above which are still under the FDA’s scientific review. Those ten products remain available for sale, subject to FDA’s enforcement discretion.
In response to the Classic BIDI® Stick MDO, on January 26, 2024, Bidi filed a petition requesting that the 11th Circuit review the MDO, which Bidi believes was, among other things, arbitrary and capricious, in violation of the Administrative Procedure Act. Bidi is also seeking a stay of the MDO pending the outcome of the litigation. No assurances can be given on the outcome.
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Other Potential Product Offerings & Opportunities
In May 2023 we acquired 19 existing and 47 pending patents with novel technologies related to vaporization and inhalation technologies from GoFire. The GoFire patent portfolio includes novel technologies across extrusion dose control, product preservation, tracking and tracing usage, multiple modalities (i.e., different methods of vaporizing) and child safety. The patents and patent applications cover territories including the United States, Australia, Canada, China, the EPO (European Patent Organization), Israel, Japan, Mexico, New Zealand and South Korea. The portfolio also includes a proprietary mobile device software application that is used in conjunction with certain patents in the portfolio.
In the near term, we expect to seek third-party licensing opportunities in the cannabis, hemp/CBD, nicotine, nutraceutical and pharmaceutical markets, as a means of monetizing our patents. Longer term, we believe we can utilize the acquired patents to create innovative and market-disruptive products for its growing base of adult consumers, including patent protected vaporizer devices and related hardware and software applications.
As described above, we hope to generate revenue from this acquired intellectual property via licensing and product development activities. However, there can be no assurance that we will be able to implement this strategy.
Marketing Strategy
Currently, we market and place our ENDS products into national distribution channels through long-standing industry relationships in accordance with the A&R Distribution Agreement and with the assistance of QuikfillRx. We process all sales made to non-retail customers.
Our long-term marketing strategy remains based on FDA compliance and our commitment to preventing underage access to our ENDS products. As such, we steer away from social media marketing and, instead, are more focused on ground-level marketing and advertising within authorized retailer locations (i.e., advertisement on retail partners’ back-bar tobacco products area). Part of this ground-level marketing effort focuses on supporting our authorized partner stores and distributors in spreading brand awareness of our ENDS products to their adult (21 years of age and older) consumer base by providing in-store marketing materials.
Retail stores also have access to online informative videos about the Bidi story, which can be used to educate and assist in training all of their staff members about the core values of Bidi. From a recycling initiative to the commitment to preventing underage ENDS use, and stand against the illicit market of ENDS products, we believe that together with Bidi, we are taking the necessary steps to ensure that our partners are aligned with our community goals.
We also attend trade shows at established expos throughout the United States and we have a dedicated sales and marketing team that focuses on these efforts and more.
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We conduct our sales and marketing activities in close coordination with our consultant QuikfillRx. Pursuant to our Service Agreement with QuikfillRx (most recently amended as of November 9, 2022), QuikfillRx provides services and support relating to our sales management function (including, without limitation, services and support relating to business planning and strategy development, staffing and recruitment, training and onboarding, direct sales and marketing, and monitoring and results evaluation), website development and design, graphics, content, public communication, social media, management and analytics, and market and other research.
Philip Morris 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-cigarette products based on the intellectual property in certain international markets set forth in the PMI License Agreement (or the PMI Markets). We have the exclusive international distribution rights to 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 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 costs and expenses 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 payment for the sale of each unit of product manufactured and sold. 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 a percentage 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 for all markets for each applicable twelve (12)-month period. PMPSA may require modification of certain products to be sold under the PMI Licensing Agreement to be modified for a PMI Market. Pursuant to the PMI Licensing Agreement, PMPSA has absolute discretion over sales, marketing, product branding and packaging pertaining to sales in the PMI Markets, as well as the right to select the specific PMI Markets in which to launch commercialization and determine what product types are to be promoted in each market, subject to sales and marketing plans and annual business plans set by PMPSA and certain expansion criteria agreed between PMPSA and KBI.
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). These royalties may be initially offset on a limited basis by jointly agreed upon costs such as development costs incurred for entry to specific international markets.
On August 12, 2023, we executed and entered into a Deed of Amendment No. 1 (the “PMI License Amendment”) with PMPSA, Bidi and KBI. Pursuant to the PMI License Amendment (which has an effective date of June 30, 2023), the following material changes have been made to the PMI License Agreement:
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(i) Royalty Rate. The royalty paid by PMPSA to KBI will no longer be based on sales price of the product being sold, but rather on the volume of liquid contained within product being sold. The royalty will be on a sliding scale of between $0.08 to $0.16 per sale based on the volume of liquid contained in the product, increasing to between $0.10 to $0.20 per sale upon meeting certain sales milestones. For purposes of determining aggregate sales threshold, all sales undertaken since commencement of the PMI Licensing Agreement will be counted.
(ii) Elimination of Certain Potential Royalty Adjustments. Certain potential adjustments to the royalties receivable by KBI as provided for in the PMI License Agreement have been eliminated.
(iii) Guaranteed Royalty. The guaranteed royalty payment owed to KBI under the PMI License Agreement has been eliminated. Instead, royalties will be paid on a quarterly basis going forward based on actual sales. Any unpaid guaranteed royalty has been cancelled.
(iv) Insurance Tail Requirements. KBI’s requirement to keep certain tail insurance after the expiration or termination of the PMI Licensing Agreement was reduced from 6 years to 2 years.
(v) Markets. The identification of the PMI Markets that PMI may enter has been expanded to cover certain additional territories.
(vi) Net Reconciliation Payment to KBI. As a result of the changes to the PMI License Agreement described in paragraphs (i) thought (iii) above, the value of such changes was calculated and reconciled as of the date of commencement of the PMI Licensing Agreement through June 30, 2023. On September 8, 2023, the Company received the Net Reconciliation Payment from PMPSA of $134,981 pursuant to this provision. The KBI License Agreement provides that KBI shall pay Bidi license fees equivalent to 50% of the adjusted earned royalty payments, after any offsets due to jointly agreed costs such development costs incurred for entry to specific international markets. In March 2023, PMPSA announced the launch of a product (now called VEEV NOW) under the PMI License Agreement.
In connection with the PMI License Agreement, we, Bidi, and PMPSA also entered into a 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, we, Bidi, and PMPSA entered into a guarantee, whereby we and Bidi guarantee 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.
In November 2023, KBI, Bidi and PMPSA agreed to initiate a pilot project, pursuant to which PMPSA would manufacture up to an agreed upon number of Bidi Sticks with PMI’s own e-liquid for commercialization in Canada. Based on the results of the pilot, we and PMPSA may consider appropriate changes or amendments to the PMI License Agreement to accommodate the manufacturing and sales of Bidi Sticks containing PMI e-liquids in Canada. As of the date of this Report, we do not believe this pilot program is, overall, material to our business or results of operations.
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KBI License Agreements
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 PMI License Agreement. Such irrevocable license includes: (i) the right of KBI to grant sub-licenses to PMPSA under the PMI License Agreement for the express purposes set forth in the PMI License Agreement, but for no other purpose; (ii) the right of KBI to grant to PMPSA the right to grant sub-sub-licenses in the manner set forth in the PMI License Agreement, but for no other purpose; and (iii) certain branding rights to the extent (but only to the extent) necessary to permit KBI to perform its obligations to PMPSA as set forth in the PMI License Agreement.
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 between 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.
Resellers
Currently, our potential distribution network reach is approximately 48,000 stores in the United States. Our products can be found in many national and regional convenience-store chains, such as QuikTrip and GPM Investments, as well as at convenience stores (known in the industry as “c-stores”) serviced through distributors such as S. Abraham and Sons and H.T. Hackney Co. Finally, our products are also accessible to adults 21 years of age and older through the age-gated digital delivery service mobile application, GoPuff, in more than 50 cities across the United States.
Concentrations
Concentration of Purchases and Other Receivable - Related Party:
For the year ended October 31, 2023, 100% of the inventories of Products, consisting solely of the BIDI® Stick, were purchased from Bidi, a related party company that is owned by Nirajkumar Patel, our Chief Science and Regulatory Officer and director, in the amount of approximately $12.8 million, as compared to $1.5 million for the year ended October 31, 2022.
On October 31, 2023, a credit of $2,954,470 was applied from the related-party receivable balance to the related party accounts payable balance. After this was applied, we had no related party receivable balance. As of October 31, 2023, the related party accounts payable balance was $1,5,21,491. In fiscal year 2023, such inventories accounted for 100% of the total related party accounts payable. There was no related party accounts payable balance as of October 31, 2022.
Concentration of Revenues and Accounts Receivable:
For the year ended October 31, 2023, a substantial portion of our revenues from the sale of Products, solely consisting of the BIDI® Stick, were derived from the following customers: (i) GPM Investments generated approximately 15%, (ii) H.T. Hackney Co generated approximately 14%, (iii) FAVS Business, LLC generated approximately 14%, (iv) C Store Master generated approximately 13%, and (v) QuikTrip Corporation generated approximately 11%.
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For the year ended October 31, 2022, a substantial portion of our revenues from the sale of Products, solely consisting of the BIDI® Stick were derived from the following customers: (i) Favs Business, LLC (“Favs Business”) generated approximately 31%, (ii) H.T. Hackney Co. generated approximately 15%, and (iii) GPM generated approximately 12%. In addition, FAVS Business LLC, C Store Master, and QuikTrip Corporation accounted for approximately 35%, 35%, and 19% of the total accounts receivable from customers, respectively, as of October 31, 2023. Favs Business and QuikTrip Corporation accounted for approximately 65% and 15% of the total accounts receivable from customers, respectively, as of October 31, 2022.
Environment and Government Regulation Related to our Operations
Because we are only a wholesale distributor of products, namely the BIDI® Stick, we are only subject to Federal, state, and international laws pertaining to a distributor, not a manufacturer, of ENDS products.
Our business is dependent entirely on the resale of products provided by Bidi; thus, there is a significant risk that our business could be materially adversely affected if Bidi, as the manufacturer, does not properly abide by any Federal, state, or international laws that regulate ENDS products. Any lapse in production or availability of products from Bidi would hamper our ability to operate as we would be limited in our ability to supply our customers if our inventory ran low or ceased to exist entirely.
As a manufacturer of ENDS products, Bidi is responsible for abiding by and following various rules and regulations pertaining to the manufacturing of the ENDS products we sell and any lapse in abiding by any pertinent rules and regulations may negatively impact our ability to operate. As a distributor, we are also subject to various rules and regulations. Some of the below may not directly apply to us at this time due to the nature of our present operations. These rules and regulations include, but are not limited to, the following:
FDA and Related Regulations Relating to ENDS Products
Effective August 8, 2016, the FDA’s regulatory authority under The Family Smoking Prevention and Tobacco Control Act was extended to all remaining tobacco products, including: (i) certain “new generation” products (such as electronic cigarettes, vaporizers, and e-liquids) and their components or parts (such as tanks, coils, and batteries); (ii) cigars and their components or parts (such as cigar tobacco); (iii) pipe tobacco; (iv) hookah products; or (v) any other tobacco product “newly deemed” by the FDA (the “Deeming Rule”). The Deeming Rule applies to all products made or derived from tobacco intended for human consumption but excluding accessories of tobacco products (such as lighters). Furthermore, starting in April 2022, FDA was also granted authority to regulate products containing synthetic (non-tobacco) nicotine as tobacco products. Specifically, the Consolidated Appropriations Act of 2022 amended the definition of a “tobacco product” in the Food, Drug and Cosmetic Act and gave the FDA authority to regulate products containing nicotine from any source, including synthetic nicotine.
The Deeming Rule requires (i) United States manufactured products be registered with the FDA and that products include ingredient listings; (ii) newly deemed products be marketed only after FDA review and authorization, subject to FDA’s compliance enforcement policy; (iii) products only make direct and implied claims of reduced risk if the FDA authorizes after finding that scientific evidence supports the claim and that marketing the product will benefit public health as a whole; (iv) sellers of such products refrain from distributing free samples; (v) sellers of such products implement minimum age and identification restrictions to prevent sales to individuals under age 18 (later extended to 21); (vi) packaging of and advertisements for products include prescribed health warnings; and (vii) sellers refrain from selling Bidi products in vending machines, unless the machine is located in a facility that never admits youth. We, along with Bidi, must comply with these regulations. Any lapse in compliance by us, or Bidi, could hamper our ability to operate, which would adversely affect the results of operations.
Newly deemed tobacco products are also subject to the other requirements of the Tobacco Control Act, such as Bidi products cannot be adulterated or misbranded. The FDA could in the future promulgate good manufacturing practice regulations for these and our other products, which could have a material adverse impact on Bidi’s ability to, and the cost to, manufacture our products, which would adversely affect our financial condition and results of operations.
Failure to comply with the Tobacco Control Act and or with any FDA regulatory requirements could result in litigation, criminal convictions or significant financial penalties and could impair our ability to market and sell our electronic and vaporizer products. At present, we are unable to predict whether the Tobacco Control Act will impact our products to a greater degree than competitors in the industry, thus affecting our competitive position.
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As part of the “Consolidated Appropriations Act, 2021,” signed into law on December 27, 2020, Congress amended the PACT Act to apply to ENDS, which includes the BIDI® Stick. The PACT Act regulates the sale, transfer, or shipment of cigarettes, roll-your-own tobacco, smokeless tobacco, and now ENDS, for both business-to-business transactions as well as online sales. The PACT Act imposes substantial restrictions on sellers and shippers of ENDS products, including, but not limited to registration with the Bureau of Alcohol, Tobacco, Firearms and Explosives (or ATF), registration with state Tobacco Tax Administrators, and monthly reporting requirements to state and local Tobacco Tax Administrators. Delivery sellers are subject to substantial additional restrictions, including, but not limited to, compliance with state excise tax collection requirements, licensing requirements, shipping, and packaging requirements. Companies were required to comply with PACT Act requirements beginning on or about March 28, 2021.
We have adopted the following compliance measures:
| ● | We have retained a team of legal, tax and accounting experts to advise on state and local tax, licensing, and regulatory matters associated with the distribution of the BIDI® Stick; |
| ● | We are appropriately licensed or registered in every state which requires it; |
| ● | We calculate and remit excise taxes where required; |
| ● | We have made a substantial investment in excise tax reporting and compliance software to ensure that all applicable taxes are properly calculated and remitted to the appropriate taxing authorities. The software is now completely integrated with our systems; |
| ● | We have registered with the ATF and the states into which we ship the products; |
| ● | We have implemented processes to ensure timely filing of all required reporting; and |
| ● | In February 2021, we ceased all direct-to-consumer sales. |
Federal Trade Commission
The Federal Trade Commission (FTC) routinely requests various industry sectors to provide information on marketing and advertising practices, and typically summarizes the aggregate information provided by all respondents in a public report. The FTC issued what is known as an “Order to File Special Report” to a number of vaping industry members, including Bidi, on June 2, 2022. Upon being advised of the exclusive distribution arrangement between Bidi and our company, the FTC withdrew the request directed to Bidi on August 22, 2022, and issued a request to us on August 29, 2022. We responded timely to the FTC request on November 30, 2022. No further requests were received from the FTC to date.
State and Local Regulations
As a retail seller and/or wholesale distributor of ENDS and related products, we must follow several state and local regulations. Individual U.S. state laws and regulations concerning e-cigarette and related products are also relatively new and developing. Currently, certain state laws about e-cigarette and related products serve to define and/or tax tobacco products or e-cigarette and related products, restrict access to youth and/or retail sale, require a license to sell such products, ban e-cigarette use in certain public spaces, and require child resistant packaging on products containing e-liquids. In addition, a number of states and localities have banned the sale of non-tobacco flavored tobacco products. Recently, for example, California passed Proposition 31, which prohibits the sale of non-tobacco flavored tobacco products, including e-cigarettes, in retail locations. Thus, the non-tobacco flavored BIDI® Sticks are not permitted to be sold in California retail locations. We anticipate more states and localities will take this approach. As a distributor, we hold all required state licenses and permits, and pay all applicable state e-cigarette and related products excise taxes. We work closely with Bidi to ensure that it is compliant with applicable manufacturer specific state requirements, such as any warning requirements (e.g., California Proposition 65).
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Excise Taxes on Vapor Products
Vapor products are currently subject to excise taxes at the state and local level. Currently, approximately 31 states, plus various localities and jurisdictions, impose a tax on vapor products. We anticipate that state and localities will likely continue to impose new excise taxes on these products and / or increase existing excise taxes for the purpose of funding various legislative initiatives, filling revenue shortfalls, and / or to reduce consumption. In addition, while ENDS products are not currently subject to excise tax at the federal level, legislation to impose excise taxes at the federal level has been introduced in the past and could potentially be adopted in the future. Any future enactment of excise tax increases at the federal, state, or local level could potentially result in lower consumption, a shift in sales to discount brands, illicit trade channels or alternatives as consumers seek lower priced products, any of which could result in a decline of our shipment volume, revenue, and profit. We ceased all direct-to-consumer sales in February 2021.
International Regulations and Pertinent Information
The World Health Organization’s Framework Convention on Tobacco Control (the “FCTC”) is the first international public health treaty that establishes a global agenda to reduce initiation of tobacco use and regulate tobacco to encourage tobacco cessation. Over 170 governments worldwide have ratified the FCTC. The FCTC has led to increased efforts to reduce the supply and demand of tobacco products and to encourage governments to further regulate the tobacco industry. The tobacco industry expects significant regulatory developments to take place over the next few years, driven principally by the FCTC. Regulatory initiatives that have been proposed, introduced, or enacted include:
| ● | the levying of substantial and increasing tax and duty charges; |
| ● | restrictions or bans on advertising, marketing, and sponsorship; |
| ● | restrictions or bans on advertising, marketing, and sponsorship; |
| ● | the display of larger health warnings, graphic health warnings, and other labeling requirements; |
| ● | restrictions on packaging design, including the use of colors and generic packaging; |
| ● | restrictions or bans on the display of tobacco product packaging at the point of sale, and restrictions or bans on cigarette vending machines; |
| ● | requirements regarding testing, disclosure, and performance standards for tar, nicotine, carbon monoxide, and other smoke constituents’ levels; |
| ● | requirements regarding testing, disclosure, and use of tobacco product ingredients; |
| ● | increased restrictions on smoking in public and workplaces and, in some instances, in private places and outdoors; |
| ● | elimination of duty-free allowances for travelers; and |
| ● | encouraging litigation against tobacco companies. |
If the United States becomes a signatory to the FCTC and/or national laws are enacted in the United States that reflect the major elements of the FCTC, our business, results of operations and financial condition could be materially and adversely affected.
Environmental Laws
We may be subject to federal, state, and local environmental laws and regulations. Compliance with these provisions has not had, nor do we expect such compliance will have any, material adverse effect upon our capital expenditures, financial condition, or competitive position. We believe that we are not subject to any material costs for compliance with any environmental laws.
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Competition
Because we solely distribute Bidi’s products, which comprises all our business operations, Bidi’s competitors in the ENDS industry are indirect competitors of ours. Many of these competitors in the ENDS industry are better capitalized than we are and have access to greater resources, financial, and otherwise. We believe that our ability, and Bidi’s ability, to effectively compete in the industry and acquire a strong market position is, and will continue to be, in large part due to the growing recognition of the Bidi brand name, the perceived quality of each of our products, and the ongoing efforts of our sales, marketing, and distribution teams. Through Bidi, we compete against, just to name a few, what we refer to as “big tobacco” companies, including Altria Group, Inc. (formerly Philip Morris); British American Tobacco p.l.c. (formerly Reynolds); Swedish Match; Swisher International; and manufacturers including U.K. based Imperial Brands, PLC, NJOY, and Logic Technology. “Big tobacco” has substantially greater resources, and a customer base that has historically demonstrated loyalty to their brands, which can pose a significant hurdle to competitors operating in the same, or similar, industries.
Competition in the ENDS industry is based upon not only brand quality and positioning but also on price, packaging, promotion, and retail availability and visibility. Given the decreasing prevalence and public acceptance of cigarette consumption, the “big tobacco” companies continue to demonstrate an increased interest and participation in other/additional tobacco industries/markets. As such, we consider the “big tobacco” companies to be our primary competitors now, but it is our belief that we have the capability to compete successfully.
Intellectual Property
As of the date of this Report, we own the trademarks KAIVAL BRANDS and KAIVAL LABS. In addition, we purchased certain intellectual property assets of GoFire consisting of various patents, patent applications and trademarks in exchange for equity securities of our company and certain contingent cash consideration. The purchased assets consist of 19 existing patents and 47 pending patents with novel technologies related to vaporization and inhalation technologies. The patents and patent applications cover the U.S. and several international territories. The purchased assets also include four registered and two pending trademarks.
We rely on certain intellectual property rights, including logos, trademarks, and trade names, of Bidi that were granted to us pursuant to the A&R Distribution Agreement to be used in connection with the marketing, advertisement, and sale of products. We also indirectly rely on Bidi’s intellectual property rights related to products, such as patents. If a third-party challenged Bidi’s patents, or infringed upon such rights, our business would be materially adversely affected.
Employees
As of the date of this Report we have eighteen employees, all of whom are full-time, including our officers. In addition to our officers, we have employees who fulfill the roles of sales staff, information technology, web development, warehouse staff, and financial accounting and reporting management. All our employees are eligible to enroll, or have already enrolled, in our medical plan.
Emerging Growth Company
We are an emerging growth company (“EGC”), 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 reporting and disclosure rules of the Securities and Exchange Commission (the “SEC”). 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, which 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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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 affected 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.
2018 Holding Company Reorganization
On September 4, 2018, USSE Delaware, Inc., a Delaware corporation (“USSE Delaware”) acquired all of our then-outstanding shares of common stock, resulting in us becoming its wholly owned subsidiary. On September 19, 2018, our wholly owned subsidiary, USSE Merger Sub, Inc., a Delaware corporation (“USSE Merger Sub”), merged with and into USSE Delaware, our then parent, effected a reorganization (the “Holding Company Reorganization”) in accordance with the provisions set forth in Section 251(g) of the Delaware General Corporation Law (“DGCL”). USSE Delaware was the surviving corporation and our wholly owned subsidiary. USSE Delaware also changed its name to USSE Corp. following the Holding Company Reorganization.
Upon completion of the Holding Company Reorganization, by virtue of the merger, and without any action on the part of the holder thereof, each share of USSE Delaware’s common stock issued and outstanding immediately prior to the effective time of the Holding Company Reorganization was automatically converted into one validly issued, fully paid, and non-assessable share of our Common Stock. Additionally, each share of USSE Delaware’s preferred stock issued and outstanding immediately prior to the effective time was converted into one validly issued, fully paid, and non-assessable share of our preferred stock, having the same designations, rights, powers, and preferences, and the qualifications, limitation, and restrictions thereof, as the corresponding share of USSE Delaware’s preferred stock. Each share of our Common Stock issued and outstanding and held by USSE Delaware immediately prior to the effective time was canceled.
2018 Change of Control
On October 19, 2018, we issued 500,000,000 shares of restricted Common Stock and 400,000 shares of Convertible Series B preferred stock to GMRZ Holdings LLC, a Nevada limited liability company (“GMRZ”), for services rendered to us. GMRZ became our controlling stockholder as a result of such issuances. On February 6, 2019, we entered into a non-binding Share Purchase Agreement (the “Agreement”) by and among GMRZ, Kaival Holdings, LLC (formerly known as Kaival Brands Innovations Group, LLC), a Delaware limited liability company (“Kaival Holdings”), and us, 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 Kaival Holdings, and Kaival Holdings paid GMRZ consideration in the amount set forth in the Agreement (the “Purchase Price”). The consummation of the transactions contemplated by the Agreement resulted in a change in control of us, with Kaival Holdings becoming our largest controlling stockholder. The sole voting members of Kaival Holdings are Nirajkumar Patel and Eric Mosser (a former executive and director of our company), with Mr. Patel holding voting control. The Purchase Price was paid with personal funds of the members of Kaival Holdings.
2020 Share Cancellation and Exchange Agreement
On August 19, 2020, we entered into a Share Cancellation and Exchange Agreement (the “Share Cancellation and Exchange Agreement”) with our controlling stockholder, Kaival Holdings.
Pursuant to the Share Cancellation and Exchange Agreement, Kaival Holdings returned to us 300,000,000 shares of our Common Stock (the “Cancellation Shares”), which Cancellation Shares were canceled and retired by us. Following such cancellation, Kaival Holdings owns 204,000,000 shares of our Common Stock.
On August 19, 2020, we filed a Certificate of Designation of Preferences, Rights, and Limitations of the Series A Preferred Stock (the “Series A Certificate of Designation”) with the Secretary of State of the State of Delaware, which authorized a total of 3,000,000 shares, par value $0.01 per share, of Series A Preferred Stock (the “Series A Preferred Stock”).
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In exchange for the Cancellation Shares, we issued 3,000,000 shares (the “Preferred Shares”) of our newly designated Series A Preferred Stock to Kaival Holdings. The exchange of the Cancellation Shares and the issuance of the Preferred Shares was intended to comply with Section 3(a)(9) of the Securities Act, in that the issuance was exempt from the registration requirements of the Act because the exchange of the Cancellation Shares for the Preferred Shares was an exchange between us, as issuer, with an existing stockholder, and no commission or other remuneration was paid or given directly for the exchange.
2021 Reverse Stock Split
On July 16, 2021, we filed a Certificate of Amendment to the Amended and Restated Certificate of Incorporation with the Secretary of State of the State of Delaware to affect a 1-for-12 reverse stock split (the “Reverse Stock Split”) of the shares of our 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 our 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, our Board approved appropriate and proportional adjustments to all outstanding securities or other rights convertible or exercisable into shares of our 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 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 our Common Stock was not affected by the Reverse Stock Split.
2022 Series A Preferred Shares Converted
The authorized preferred stock of the Company consists of 5,000,000 shares with a par value of $ 0.001 per share, of which 3,000,000 shares were designated as Series A Convertible Preferred Stock (the “Series A Preferred Stock”). Each share of the Series A Preferred Stock was initially convertible into 100 shares of Common Stock; however, as a result of the Reverse Stock Split, the conversion rate was adjusted such that each share of the Series A Preferred Stock was convertible into approximately 0.3968 shares of Common Stock. On June 24, 2022, all 3,000,000 shares of Series A Preferred Stock were converted into shares of Common Stock by Kaival Holdings, our majority stockholder. The conversion of 3,000,000 shares of Series A Preferred Stock, at a conversion rate of 0.3968, equaled 1,190,477 shares of Common Stock. As a result, the authorized, preferred stock of the Company consists of 5,000,000 shares with a par value of $0.001 per share, with 0 shares of preferred stock issued or outstanding as of October 31, 2022.
May 2023 GoFire Asset Purchase Agreement
On May 30, 2023, we and Kaival Labs entered into an Asset Purchase Agreement (the “GoFire APA”) with GoFire. Pursuant to the terms of the GoFire APA, we, through Kaival Labs, purchased certain intellectual property assets of GoFire consisting of various patents, patent applications and trademarks in exchange for equity securities of our company and certain contingent cash consideration. The purchased assets consist of 12 existing patents and 46 pending patents with novel technologies related to vaporization and inhalation technologies. The patents and patent applications cover the U.S. and several international territories. The purchased assets also include four registered and two pending trademarks. We have determined that the acquisition of the purchased assets does not constitute the acquisition of a “business” (as defined in Rule 11-01(d) of Regulation S-X).
Pursuant to the terms of the GoFire APA, we paid to GoFire, in addition to certain contingent cash consideration described below, consideration in the form of equity securities of our company consisting of (i) an aggregate of 95,239 shares of Common Stock (the “2023 APA Shares”); (ii) 900,000 shares of newly-designated Series B Convertible Preferred Stock, par value $0.001 per share, (the “Series B Preferred Stock” and the shares of Common Stock underlying the Series B Preferred, the “Series B Conversion Shares”), the rights, preferences and terms of which are set forth in a Certificate of Designation of Rights and Preferences of the Series B Preferred Stock, and (iii) a Common Stock purchase warrant to purchase 95,239 shares of Common Stock (the “Warrant” and the shares of Common Stock underlying the Warrant, the “Warrant Shares”). As additional consideration for the purchased assets, any cannabis-specific (meaning cannabis, hemp or cannabinoid) royalties that are generated by Kaival Labs from or due to the purchased assets, from May 30, 2023, until January 1, 2027, will be subject to a contingent cash payment as described in the GoFire APA and subject to the terms of the GoFire APA. 9,524 2023 APA Shares and a Warrant for 9,524 Warrant Shares were issued to an advisor to GoFire at the closing of the GoFire APA.
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Pursuant to the GoFire APA, we are required to use commercially reasonable efforts to register the 85,715 2023 APA Shares and 85,715 Warrants and Warrant Shares with the SEC for distribution to GoFire’s stockholders and/or public resale by such stockholders within 180 days of May 30, 2023. Such registration was declared effective by the SEC on January 12, 2024. To our knowledge, portions of the 85,715 2023 APA Shares and 85,715 Warrants have been distributed to the GoFire stockholders pursuant to such registration statement.
In addition, if any Series B Preferred Stock remains outstanding nineteen (19) months after May 30, 2023, we shall use commercially reasonable efforts to file with the SEC subsequent registration statement registering the distribution to GoFire’s stockholders and/or public resale Series B Conversion Shares by such stockholders. If such subsequent registration statement is required, we will use our commercially reasonable efforts to obtain effectiveness of such subsequent registration statement within nineteen (19) months of May 30, 2023, and if we do not so register the Series B Conversion Shares within nineteen (19) months of May 30, 2023, we will issue to GoFire or its designee an additional ten percent (10%) of all of the Series B Conversion Shares underlying the then-outstanding shares of Series B Preferred Stock.
All of the securities issued as consideration for the GoFire purchased assets were subject to a lock-up agreement that terminated on November 26, 2023.
2024 Reverse Stock Split
On January 22, 2024, we filed a Certificate of Amendment to the Amended and Restated Certificate of Incorporation with the Secretary of State of the State of Delaware to affect a 1-for-21 reverse stock split (the “2024 Reverse Stock Split”) of the shares of our Common Stock. The 2024 Reverse Stock Split became effective on January 25, 2024 on the Nasdaq Stock Market. No fractional shares were issued in connection with the 2024 Reverse Stock Split. Any fractional shares of our Common Stock that would have otherwise resulted from the 2024 Reverse Stock Split were rounded up to the nearest whole number. In connection with the 2024 Reverse Stock Split, our Board approved appropriate and proportional adjustments to all outstanding securities or other rights convertible or exercisable into shares of our Common Stock, including, without limitation, all preferred stock, warrants, options, and other equity compensation rights. The par value per share of our Common Stock was not affected by the 2024 Reverse Stock Split.
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Item 1A. Risk Factors.
Our business and an investment in our company is speculative and subject to significant risks. We caution you that the following important factors, among others, could cause our actual results to differ materially from those expressed in forward-looking statements made by us or on our behalf in filings with the SEC, press releases, communications with investors and oral statements. Any or all of our forward-looking statements contained in this Report and in any other public statements we make may turn out to be wrong. They can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties. Many factors mentioned in the discussion below will be important in determining future results. Consequently, no forward-looking statement can be guaranteed. Actual future results may differ materially from those anticipated in forward-looking statements. We undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any further disclosure we make in our reports filed with the SEC.
Risks Related to Our Business and Industry
We have a present need for additional funding, which raises questions about our ability to continue as a going concern. We may be unable to raise capital when needed, which would force us to delay, reduce or eliminate aspects of our business or cause our business to fail.
As of October 31, 2023, we had cash and cash equivalents of only approximately $0.5 million. We believe that based on our current operating plan, our existing cash and cash equivalents will only be sufficient to enable us to fund our operations and our debt and other obligations for a very limited period. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”
Moreover, we will need significant additional funds to satisfy our outstanding payables, fund our working capital, and fully implement our business plan as we seek to grow our revenues and ultimately achieve positive cash flow and profitability. In addition, our ability to continue as a going concern is adversely affected by the uncertainty surrounding Bidi’s PMTA process with FDA and outcome of Bidi petition with the 11th Circuit Court of Appeals regarding the FDA’s January 2024 MDO relating to Classic Bidi® Stick as well as our negative cash flows from operations, significant recurring losses and present need for additional funding. All of these factors raise substantial doubt regarding our ability to continue as a going concern.
There is therefore a material risk that we will be unable to generate sufficient revenues to pay our expenses, and if our existing sources of cash and cash flows are insufficient to fund our activities, we will need to raise additional funds. Additional equity or debt financing may not be available on acceptable terms, if at all, particularly in the current economic environment. If adequate funds are not available, we may be required to delay, reduce the scope of or eliminate one or more of our new products in development.
Until such time, if ever, we can generate substantial product revenues, we will be required to finance our cash needs through public or private equity offerings, debt financings and corporate collaboration and licensing arrangements. If we elect to raise additional funds by issuing equity securities, our stockholders may experience dilution. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. Any debt financing or additional equity that we may raise may contain terms, such as liquidation and other preferences, that are not favorable to us or our stockholders. If we raise additional funds through collaboration and licensing arrangements with third parties, it may be necessary to relinquish valuable rights to our technologies, research programs or product candidates or grant licenses on terms that may not be favorable to us.
If we are unable to generate cash flow positive operations or achieve profitability, and if we are unable to raise additional funds on commercially reasonable terms or at all, we may be required to significantly reduce or cease our operations, declare bankruptcy or our business could fail, which could result in the loss to investors of their investment in our securities.
We currently rely exclusively on Bidi as the supplier of the Bidi products that we distribute. The loss of this relationship, or any negative impacts on Bidi’s ability to manufacture the Bidi products, would severely harm our business.
Pursuant to the A&R Distribution Agreement between us and Bidi, Bidi has engaged us to act as the sole distributor of the ENDS products and related components, including the BIDI® Stick, manufactured by Bidi. Any failure by Bidi to fulfil its obligation under the A&R Distribution Agreement could have a material adverse effect on our revenue and operating results and operating cash flows; and could impair the strength of our brand.
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In addition, because of our dependence on Bidi as the exclusive supplier of our products, any loss of our relationship with Bidi, or any adverse change in the financial health of Bidi that would affect its ability to perform its obligations under the A&R Distribution Agreement, would have a material adverse effect on our revenue, operating results, and ability to run our business.
Further, Bidi is subject to supply shortages and interruptions, long lead times, and act-of-God events such as global pandemics, weather related catastrophes, or conflict, any of which could disrupt the operations of Bidi and have a material adverse impact on our results of operations. We may be unable to identify or contract with new suppliers or producers in the event of a disruption to our supply and could experience a material adverse effect on our revenue, operating results, and ability to run our business.
The terms of our agreements with Bidi, including our A&R Distribution Agreement, may not always be as favorable to us as the terms that may be obtained by arms’ length negotiation.
We currently are, and we anticipate that we will continue to be, substantially dependent on our relationships with our affiliated entities, including Bidi. We believe that our current arrangement with Bidi provides our business with stability and transparency. Although we believe that the terms of the A&R Distribution Agreement are as favorable to us as what we could have obtained in an arm’s length transaction, there can be no assurance that this arrangement or any future agreements that we enter with Bidi, or any other affiliated entity, will be as favorable to us as we may be able to negotiate with unaffiliated parties.
We rely primarily on Bidi for access to our key intellectual property rights, and any change in our relationship could adversely alter such rights or our access to them.
We currently have no intellectual property rights other than the intellectual property assets we acquired in May 2023 from GoFire and our trademarks KAIVAL BRANDS and KAIVAL LABS. We rely on the intellectual property rights, including logos, trademarks, and trade names, of Bidi that were granted to us pursuant to the A&R Distribution Agreement to be used in connection with the marketing, advertisement, and sale of the Bidi products. We also indirectly rely on Bidi’s intellectual property rights related to the Bidi products, such as patents. We have from time to time considered, and discussed with Bidi, potential alterations to this arrangement, including a potential acquisition by us of all or a portion of the intellectual property owned by Bidi and related to Bidi products. Should we pursue such a transaction, it would be a “related party transaction,” as defined by the listing rules of Nasdaq and, thus, subject to the review of the Audit Committee of our Board (or, if deemed appropriate, a special Board committee comprised of disinterested directors). Further, should we undertake such a transaction, then we would become responsible to respond if a third-party challenged Bidi’s patents, or infringed upon such rights, in which case our business could be materially adversely affected.
We outsource key sales and marketing and other key functions to QuikfillRx, and the loss of this relationship would damage our business.
We conduct our sales and marketing activities in close coordination with our consultant QuikfillRx. Pursuant to our agreement with QuikfillRx (most recently amended in November 2022), QuikfillRx provides key services to us. We are therefore reliant on our relationship with QuikfillRx, and the loss of that relationship for any reason would significantly damage our ability to operate our business.
We have a limited operating history, and our historical operating and financial results may not be indicative of future performance, which, along with the relative early stage of the ENDS industry, makes it difficult to predict our future business prospects and financial performance.
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Our current business model is relatively new, and so business and prospects may be difficult to evaluate. Our limited operating history makes it difficult to evaluate both our operating history and our future potential. We have yet to demonstrate a consistent ability to generate revenue, and are still subject to many of the risks common to early-stage companies operating in the nicotine and non-nicotine delivery system products sector, including the uncertainty as to our ability to implement our business plan, market acceptance of business plan, under-capitalization, cash shortages, limitations with respect to personnel, financing and other resources and uncertainty of our ability to generate revenues. There is therefore a significant risk that our activities will not result in any material revenues or profit, and the likelihood of our business viability and long-term prospects must be considered in light of the stage of our development. There can be no assurance that we will be able to fulfill our stated business strategy and plans, or that financial, technological, market, or other limitations may force us to modify, alter, significantly delay, or significantly impede the implementation of such plans. We have insufficient results of operations in our current business model for investors to use to identify historical trends. Investors should consider our prospects considering the risk, expenses and difficulties we will encounter as an early-stage company. Our revenue and income potential is unproven and our business model is continually evolving. We are therefore subject to the risk that we will be unable to address these risks, and our inability to address these risks could lead to the failure of our business.
Our business is rapidly evolving and is particularly at risk given the FDA’s January 2024 MDO for Classic BIDI® Stick or in the event that Bidi’s pending PMTA for non-tobacco flavored BIDI® Sticks is denied or delayed.
The ENDS industry is relatively new and is rapidly evolving, and the FDA has been aggressive in its oversight of the ENDS industry. Changes in existing laws, regulations and policies and the issuance of new laws, regulations, policies, as well as the FDA’s actions on ENDS-related PMTAs (including Bidi’s) and any other entry barriers in relation to the ENDS industry may materially and adversely affect our ability to conduct business and our results of operations.
Bidi was among the many companies that received a MDO for its non-tobacco flavored BIDI® Sticks. On August 23, 2022, the U.S. Court of Appeals for the Eleventh Circuit set aside (i.e., vacated) the MDO issued to the non-tobacco flavored BIDI® Sticks and remanded Bidi’s PMTA back to FDA for further review. Specifically, the Court held that the MDO was “arbitrary and capricious” in violation of the Administrative Procedure Act (“APA”) because the FDA failed to consider the relevant evidence before it, specifically Bidi’s aggressive and comprehensive marketing and sales-access-restrictions plans designed to prevent youth appeal and access.
The opinion further indicated that the FDA did not properly review the data and evidence that it has long made clear are critical to the “appropriate for the protection of the public health” standard for PMTAs set forth in the Tobacco Control Act including, in Bidi’s case, “product information, scientific safety testing, literature reviews, consumer insight surveys, and details about the company’s youth access prevention measures, distribution channels, and adult-focused marketing practices,” which “target only existing adult vapor product users, including current adult smokers,” as well as our retailer monitoring program and state-of-the-art anti-counterfeit authentication system. Because an MDO must be based on a consideration of the relevant factors, such as the marketing and sales-access-restrictions plans, the denial order was deemed arbitrary and capricious, and vacated by the FDA. The FDA did not appeal the 11th Circuit’s decision.
In the meantime, Bidi has been able to continue marketing and selling the non-tobacco flavored BIDI® Sticks, subject to FDA’s enforcement discretion, for the duration of the PMTA scientific review. FDA has indicated that it is prioritizing enforcement of unauthorized ENDS against companies (1) that never submitted PMTAs, (2) whose PMTAs have been refused acceptance or filing by the FDA, (3) whose PMTAs remain subject to MDOs, and (4) that are continuing to market unauthorized synthetic nicotine products after the July 13, 2022, cutoff. As none of these scenarios apply to Bidi, we believe the risk of FDA enforcement is low. However, there is a risk that Bidi’s PMTA for non-tobacco flavored BIDI® Sticks will be denied, which would have a significant adverse affect on our business and could lead to our bankruptcy or the failure of our business entirely.
Separately, on or about May 13, 2022, FDA placed the tobacco-flavored Classic BIDI® Stick into the final Phase III scientific review. In March 2023, FDA issued a deficiency letter regarding the Classic BIDI® Stick PMTA, to which Bidi submitted a timely response in June 2023. Subsequently, on January 22, 2024, FDA issued a MDO for the Classic BIDI® Stick, which Bidi is contesting via a petition for review with the 11th Circuit. The January 2024 MDO regarding Classic BIDI® Stick has had an adverse impact on our business, and the outcome of Bidi’s 11th Circuit petition is uncertain and will likely take many months or longer to resolve. Our continuing inability to sell Classic BIDI® Stick could continue to cause material impediments to our ability to operate our business and cause a material adverse affect on our results of operations.
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If it is determined or perceived that the usage of ENDS products poses long-term health risks, the use of ENDS products may decline significantly, which may materially and adversely affect our business, financial condition, and results of operations.
Negative publicity on the health consequences of ENDS products or other similar devices may also adversely affect the usage of ENDS products. For example, the FDA and the United States Centers for Disease Control and Prevention (“CDC”) issued a joint statement on August 30, 2019, linking a number of cases of respiratory illnesses to ENDS product use. On November 8, 2019, the CDC announced that it had preliminarily linked cases of severe respiratory illness to the presence of Vitamin E acetate, which was found in certain Tetrahydrocannabinol (THC)-containing ENDS cartridges for non-electronic nicotine delivery systems (non-ENDS) products that may have been obtained illegally. However, evidence is not sufficient to rule out the contribution of other chemicals of concern, including chemicals in either THC or non-THC products (THC is the principal psychoactive constituent of cannabis). In January 2020, after further research, the FDA and CDC recommended against the use of THC-containing ENDS products, especially those from unofficial sources, and that the underage, pregnant women and adults who do not currently use tobacco products should not start using ENDS products. On February 25, 2020, the CDC issued a final update, stating that the number of cases of severe respiratory illnesses had declined to single digits as of February 9, 2020. The CDC also reconfirmed that (i) Vitamin E acetate, which was found in some THC-containing ENDS cartridges for non-ENDS ENDS products that were mostly obtained illegally, was strongly linked to and indicated to be the primary cause of the severe respiratory illnesses, and (ii) THC-containing ENDS products from informal sources were linked to most cases of severe respiratory illnesses. Furthermore, there have been recent claims that users of ENDS products may suffer a greater risk of more serious COVID-19 complications. However, it remains unclear whether the exposure to toxic chemicals through ENDS product usage will increase the risk of COVID-19.
Research regarding the actual causes of these illnesses is still ongoing. If ENDS product usage is determined or perceived to pose long-term health risks or to be linked to illnesses, the usage of ENDS products may significantly decline, which would have a material adverse effect on our business, financial condition, and results of operations. Although we currently do not offer products containing THC, any perceived correlation between THC and Vitamin E acetate may adversely affect the public’s perception of ENDS products in general, regardless of whether such products contain THC and/or Vitamin E.
We do not expect the assets acquired from GoFire will generate immediate revenue for us, and we may never be able to develop these assets into revenue generating products.
We purchased a certain vaporizer and inhalation-related patent portfolio from GoFire in May 2023 with the goal of diversifying our business and lessening our dependence on Bidi. We do not expect that the acquired assets will generate immediate revenue for us. While we will seek to monetize the acquired intellectual property, including through third-party licensing opportunities, we can give no assurances at this time that either (i) the patent applications we acquired will result in issued patents or (ii) we will be able to successfully monetize these assets. Our failure to capitalize on our GoFire assets would materially impair our strategy of diversifying our product offerings, leaving us even more reliant on the products we distribute for Bidi.
We may not be successful in maintaining the consumer brand recognition and loyalty of our products and face intense competition and may fail to compete effectively.
We compete in a market that relies on innovation and the ability to react to evolving consumer preferences and, thus, are subject to significant competition in the ENDS market, and larger tobacco industry and compete against companies in such market and industry that have access to significant resources in terms of technology, relationships with suppliers and distributors and access to cash flow and financial markets.
Consumer perceptions of the overall safety of tobacco, nicotine, cannabis, and hemp/CBD-related products is likely to continue to shift, and our success depends, in part, on our ability to anticipate these shifting tastes and the rapidity with which the markets in which we compete will evolve in response to these changes on a timely and affordable basis. If we are unable to respond effectively and efficiently to changing consumer preferences, the demand for our products may decline, which could have a material adverse effect on our business, results of operations, and financial condition.
Regulations may be enacted in the future, particularly considering increasing restrictions on the form and content of marketing of tobacco products, that would make it more difficult to appeal to our consumers or to leverage existing recognition of the Bidi brand, or other brands that we own or license in the future. Furthermore, even if we can continue to distinguish our products, there can be no assurance that the sales, marketing, and distribution efforts of our competitors will not be successful in persuading consumers of our products to switch to their products. Many of our competitors have greater access to resources than we do, which better positions them to conduct market research in relation to branding strategies or to launch costly marketing campaigns. Any loss of consumer brand loyalty to our products or reduction of our ability to effectively brand our products in a recognizable way will have a material effect on our ability to continue to sell our products and maintain our market share, which could have a material adverse effect on our business, results of operations, and financial condition.
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The competitive environment and our competitive position are also significantly influenced by economic conditions, the state of consumer confidence, competitors’ introduction of low-priced products or innovative products, higher taxes, higher absolute prices, and larger gaps between price categories and product regulation that diminishes the consumer’s ability to differentiate tobacco products. Due to the impact of these factors, as well as higher state and local excise taxes and the market share of deep discount brands, the tobacco industry has become increasingly price competitive. As we seek to adapt to the price competitive environment, our competitors that are better capitalized may be able to sustain price discounts for long periods of time by spreading the loss across their expansive portfolios, with which we are not positioned to compete.
“Big tobacco” has also established its presence in the ENDS market and has begun to make investments in the alternative space. There can be no assurance that our products will be able to compete successfully against these companies or any of our other competitors, some of which have far greater resources, capital, experience, market penetration, sales and distribution channels than do we.
Our distribution efforts rely in part on our ability to leverage relationships with large retailers and national chains.
Our distribution efforts rely in part on our ability to leverage relationships with large retailers and national chains to sell and promote our products, which is dependent upon the strength of the Bidi brand name and, in the future, any brand names that we may own or license, and our salesforce effectiveness. To maintain these relationships, we must continue to supply products that will bring steady business to these retailers and national chains. We may not be able to sustain these relationships or establish other relationships with such entities, which could have a material adverse effect on our ability to execute our branding strategies, our ability to access the end-user markets with our products, or our ability to maintain our relationships with the manufacturer and sub-distributors of our products. For example, if we are unable to meet benchmarking provisions in certain of our contracts or if we are unable to maintain and leverage our retail relationships on a scale sufficient to make us an attractive distributor, it would have a material adverse effect on our ability to act as sole distributor for Bidi, and on our business, results of operations and financial condition.
In addition, there are factors beyond our control that may prevent us from leveraging existing relationships, such as industry consolidation. If we are unable to develop and sustain relationships with large retailers and national chains or are unable to leverage those relationships due to factors such as a decline in the role of brick-and-mortar retailers in the North American economy, our capacity to maintain and grow brand and product recognition and increase sales volume will be significantly undermined. In such an event, we may ultimately be forced to pursue and rely on local and more fragmented sales channels, which will have a material adverse effect on our business, results of operations and financial condition.
Competition from illicit sources may have an adverse effect on our overall sales volume, restricting the ability to increase selling prices and damaging brand equity.
Illicit trade and tobacco trafficking in the form of counterfeit products, smuggled genuine products, and locally manufactured products on which applicable taxes or regulatory requirements are evaded, represent a significant and growing threat to the legitimate tobacco industry and significant, and unfair, competition that we are faced with. Moreover, factors such as increasing tax regimes, regulatory restrictions, and compliance requirements are encouraging more consumers to switch to illegal, cheaper tobacco-related products, and providing greater rewards for smugglers. All of these factors based on illicit trade has had and may continue to have an adverse effect on our overall sales volume, may restrict the ability to increase selling prices, damage our brand equity, and may lead to commoditization of our products. If we are unable to manage the risks posed by illicit competition, our results of operation and overall business may suffer.
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Our products are regulated by the FDA, which has broad regulatory powers. Increases in tobacco-related taxes have been proposed or enacted and are likely to continue to be proposed or enacted in numerous jurisdictions.
Tobacco products, premium cigarette papers, and tubes have long been subject to substantial federal, state, and local excise taxes. Such taxes have frequently been increased or proposed to be increased, in some cases significantly, to fund various legislative initiatives or further disincentivize tobacco usage. Since 1986, smokeless products have been subject to federal excise tax. Federally, smokeless products are taxed by weight (in pounds or fractional parts thereof) manufactured or imported. Any increases in tobacco-related taxes may materially adversely affect the demand for our products.
The market for ENDS products is subject to a great deal of uncertainty and is still evolving.
ENDS products, having recently been introduced to market over the past 10 to 15 years, are at a relatively early stage of development, and represent core components of a market that is evolving rapidly, highly regulated, and characterized by a number of market participants. Rapid growth in the use of, and interest in, ENDS products is recent, and may not continue on a lasting basis. The demand and market acceptance for these products is subject to a high level of uncertainty. Therefore, we are subject to all the business risks associated with a new enterprise in an evolving market.
For example, ENDS products that are non-tobacco flavored continue to face the threat of prohibition at the local level, as many state and local authorities and attorneys general push for bans or request the FDA to deny a PMTA for flavored ENDS. To date, at least four states have banned the sale of flavored ENDS (e.g., New York, New Jersey, Rhode Island, and Massachusetts), with several more considering similar bans (e.g., Maryland, California, and Connecticut). As the September 9, 2021, PMTA review deadline has now passed, the FDA has implemented a de facto ban of non-tobacco flavored ENDS by denying over 99% of pending applications, while issuing zero marketing authorizations for non-tobacco flavored ENDS.
If flavors are ultimately prohibited to be sold by Bidi in the United States, the use of ENDS products may decline significantly, which may materially and adversely affect our business, financial condition, and results of operations. Continued evolution, uncertainty, and the resulting increased risk of failure of our new and existing product offerings in this market could have a material adverse effect on our ability to build and maintain market share and on our business, results of operations and financial condition.
Some of our product offerings through Bidi are subject to developing and unpredictable regulation.
Our products are sold through our distribution network and may be subject to uncertain and evolving federal, state, and local regulations, including hemp, non-THC cannabidiol (CBD) and other non-tobacco consumable products. Enforcement initiatives by those authorities are therefore unpredictable and impossible to anticipate. We anticipate that all levels of government, which have not already done so, are likely to seek in some way to regulate these products, but the type, timing, and impact of such regulations remains uncertain. These regulations include or could include restrictions including prohibitions on certain form factors, such as smokable hemp products, or age restrictions. On January 26, 2023, The FDA announced that it would not initiate rulemaking to regulate CBD as a dietary food ingredient. Rather, after careful review, the FDA has concluded that a new regulatory pathway for CBD is needed that balances individuals’ desire for access to CBD products with the regulatory oversight needed to manage risks. The FDA further indicated that it is prepared to work with Congress on this matter. Accordingly, we cannot give any assurance that such actions would not have a material adverse effect on this emerging business.
Significant increases in state and local regulation of our products have been proposed or enacted and are likely to continue to be proposed or enacted in numerous jurisdictions. The Prevent All Cigarette Trafficking (or PACT) Act, which went into effect in June 2010, amended the Jenkins Act and initially only applied to the sales of cigarettes, roll-your-own tobacco, and smokeless tobacco. Specifically, the PACT Act regulates the sale, transfer, or shipment of these products for both business-to-business transactions as well as “delivery sales,” which are defined as any sale of cigarettes, roll-your-own tobacco, or smokeless tobacco where the consumer orders the product remotely and prohibits such deliveries through the U.S. Postal Service (or USPS), except in certain circumstances (e.g., business-to-business deliveries).
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Under the enactment of the Preventing Online Sales of E-Cigarettes to Children Act (part of the larger 2021 Consolidated Appropriations Act), effective March 27, 2021, the definition of “cigarettes” in the PACT Act was amended to include ENDS, which is defined as “any electronic device that, through an aerosolized solution, delivers nicotine, flavor, or any other substance to the user inhaling from the device,” including “an e-cigarette; an e-hookah; an e-cigar; a vape pen; an advanced refillable personal vaporizer; an electronic pipe; and any component, liquid, part, or accessory of a device described above, without regard to whether the component, liquid, part, or accessory is sold separately from the device.” As such, delivery sales of the BIDI® Stick are subject to the PACT Act.
The PACT Act requires all sellers to register with the ATF, as well as the tobacco tax administrators of the states into which a shipment is made or in which an advertisement or offer is disseminated. Delivery sellers who ship cigarettes (including ENDS) or smokeless tobacco to consumers are further required to label packages as containing tobacco, verify the age, and identity of the customer at purchase, use a delivery method (other than through the USPS) that checks ID and obtains adult customer signature at delivery, and maintain records of delivery sales for a period of four years after the date of sale, among other things. Delivery sellers are also required to file a monthly report with the state tobacco tax administrator and any other local or tribal entity that taxes the sale of the products. Such reports must include the name and address of the persons delivering and receiving the shipment and the brand and quantity of the “cigarettes” that were shipped. These requirements apply to all sales, including sales to consumers and sales between businesses.
In addition to the de facto FDA flavor ban that has resulted from the denial of nearly all PMTAs for flavored ENDS, ENDS products that are non-tobacco flavored continue to face the threat of prohibition at the local level, as many state and local authorities and attorneys general push for bans or request the FDA to deny PMTAs for flavored ENDS. To date, at least four states have banned the sale of flavored ENDS (e.g., New York, New Jersey, Rhode Island, and Massachusetts), with several more considering similar bans (e.g., Maryland, California, and Connecticut).
Our supply to our wholesalers and retailers is dependent on the demands of their customers who are sensitive to increased sales taxes and economic conditions affecting their disposable income.
Consumer purchases of tobacco products are historically affected by economic conditions, such as changes in employment, salary and wage levels, the availability of consumer credit, inflation, interest rates, fuel prices, sales taxes, and the level of consumer confidence in prevailing and future economic conditions. Discretionary consumer purchases, such as the BIDI® Stick, may decline during recessionary periods or at other times when disposable income is lower, and taxes may be higher.
We may be subject to increasing international control and regulation.
The FCTC is the first international public health treaty that establishes a global agenda to reduce initiation of tobacco use and regulate tobacco to encourage tobacco cessation. Over 170 governments worldwide have ratified the FCTC. The FCTC has led to increased efforts to reduce the supply and demand of tobacco products and to encourage governments to further regulate the tobacco industry. The tobacco industry expects significant regulatory developments to take place over the next few years, driven principally by the FCTC. Regulatory initiatives that have been proposed, introduced or enacted include:
| ● | the levying of substantial and increasing tax and duty charges; |
| ● | restrictions or bans on advertising, marketing and sponsorship; |
| ● | the display of larger health warnings, graphic health warnings and other labeling requirements; |
| ● | restrictions on packaging design, including the use of colors and generic packaging; |
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| ● | restrictions or bans on the display of tobacco product packaging at the point of sale, and restrictions or bans on cigarette vending machines; |
| ● | requirements regarding testing, disclosure and performance standards for tar, nicotine, carbon monoxide and other smoke constituents levels; |
| ● | requirements regarding testing, disclosure and use of tobacco product ingredients; |
| ● | increased restrictions on smoking in public and workplaces and, in some instances, in private places and outdoors; |
| ● | elimination of duty-free allowances for travelers; and |
| ● | encouraging litigation against tobacco companies. |
Our business may be damaged by events outside of our own or Bidi’s control, such as the impact of epidemics, political changes, or natural disasters.
Our business could be adversely affected by the effects of epidemics, political changes, wars or natural disasters. World economies and capital markets have been adversely impacted by COVID-19 and its variants, the Ukraine-Russia conflict, the recent eruption of hostilities in Israel and Gaza and political instability in the United States and elsewhere. The lasting impacts of these matters on the United States and broader global economy, including supply chain disruption, may have a significant continuing negative effect on our company and may continue to materially impact our company, our ability to conduct business, our financial condition and results of operations.
Reliance on information technology means a significant disruption could affect our communications and operations.
We increasingly rely on information technology systems for our internal communications, controls, reporting and relations with customers and suppliers, and information technology is becoming a significantly important tool for our sales staff. In addition, our reliance on information technology exposes us to cyber-security risks, which could have a material adverse effect on our ability to compete. Security and privacy breaches may expose us to liability and cause us to lose customers or may disrupt our relationships and ongoing transactions with other entities with whom we contract throughout our network. The failure of our information systems to function as intended, or the penetration by outside parties’ intent on disrupting business processes, could result in significant costs, loss of revenue, assets or personal or other sensitive data and reputational harm.
Security and privacy breaches may expose us to liability and cause us to lose customers.
Federal and state laws require us to safeguard our wholesalers’, retailers’, and consumers’ financial information, including credit information. Although we have established security procedures to protect against identity theft and the theft of our customers’ financial information, our security and testing measures may not prevent security breaches. We cannot guarantee that a future breach will not result in material liability or otherwise harm to our business. In the event of any such breach, we may be required to notify governmental authorities or consumers under breach disclosure laws, indemnify consumers, or other third parties for losses resulting from the breach, and expend resources investigating and remediating any vulnerabilities that contributed to the occurrence of the breach. We rely on third-party technology to safeguard the security of sensitive information in our possession. Advances in computer capabilities, new discoveries in the field of cryptography, inadequate facility security or other developments may result in a compromise or breach of the technology used by us to protect customer data. Any compromise of our security, even a security breach that does not result in a material liability could harm our reputation and, therefore, our business and financial condition. In addition, a party who can circumvent our security measures or exploit inadequacies in our security measures, could, among other effects, misappropriate proprietary information, cause interruptions in our operations or expose customers and other entities with which we interact to computer viruses or other disruptions. Actual or perceived vulnerabilities may lead to claims against us. Any insurance coverage that we obtain to cover such risks may be insufficient to cover all claims or losses. To the extent the measures we have taken prove to be insufficient or inadequate, we may become subject to litigation or administrative sanctions, which could result in significant fines, penalties or damages and harm to our reputation.
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We may fail to manage our growth.
We have grown significantly in a short amount of time and intend to continue to grow in the future. However, any future growth will place additional demands on our resources, and we cannot be sure we will be able to manage our growth effectively. If we are unable to manage our growth while expanding the distribution of our products and increasing profit margins, or if new systems that we implement to assist in managing our growth do not produce the expected benefits, our business, financial position, results of operations and cash flows could be adversely affected. We may not be able to support, financially or otherwise, future growth, or hire, train, motivate and manage the required personnel. Our failure to manage growth effectively could also limit our ability to achieve our goals as they relate to streamlined sales, marketing and distribution operations and the ability to achieve certain financial metrics.
We are subject to fluctuations in our results that make it difficult to track trends and develop strategies in the short term.
In response to competitor actions and pricing pressures, we have engaged in significant use of promotional and sales incentives. We regularly review the results of our promotional spending activities and adjust our promotional spending programs to maintain our competitive position as well as to confirm compliance with our adult-focused marketing policies. Accordingly, unit sales volume and sales promotion costs in any period are not necessarily indicative of sales and costs that may be realized in subsequent periods. Additionally, promotional activity significantly increases net sales in the month in which it is initiated, and net sales are adversely impacted in the month after a promotion. Accordingly, based upon the timing of our marketing and promotional initiatives, we have and may continue to experience significant variability in our results, which could affect our ability to formulate strategies that allow us to maintain our market presence across volatile periods. If our fluctuations obscure our ability to track important trends in our key markets, it may have a material adverse effect on our business, results of operations and financial condition.
Adverse U.S. and global economic conditions could negatively impact our business, prospects, results of operations, financial condition or cash flows.
Our business and operations are sensitive to global economic conditions. These conditions include interest rates, energy costs, inflation, recession, fluctuations in debt and equity capital markets, and the general condition of the United States and world economies, including as a result of the effect of the COVID-19 pandemic. A material decline in the economic conditions affecting consumers, which cause a reduction in disposable income for the average consumer, may change consumption patterns, and may result in a reduction in spending on our product offerings or a switch to cheaper products or products obtained through illicit channels. As such, demand for our products may be particularly sensitive to economic conditions such as inflation, recession, high energy costs, unemployment, changes in interest rates and money supply, changes in the political environment, the ultimate effect on the economy of the COVID-19 pandemic and other factors beyond our control, any combination of which could result in a material adverse effect on our business, results of operations, and financial condition.
The departure of key management personnel and the failure to attract and retain talent could adversely affect our operations.
Our success depends upon the continued contributions of our senior management, especially our Executive Chairman and Interim Chief Executive Officer and President, Barry Hopkins, our Chief Financial Officer, Treasurer and Secretary, Thomas Metzler, our Chief Operating Officer, Stephen Sheriff and our Chief Science & Regulatory Officer, Nirajkumar Patel. If one or more of our executive officers are unable or unwilling to continue in their present positions, we may not be able to replace them readily, if at all. Additionally, we may incur additional expenses to recruit and retain new executive officers. If any of our executive officers join a competitor or forms a competing company, we may lose some or all of our customers. Finally, we do not maintain “key person” life insurance on any of our executive officers. Because of these factors, the loss of the services of any of these key persons could adversely affect our business, financial condition, and results of operations.
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Our insurance may be insufficient to cover losses that may occur as a result of our operations.
We currently maintain directors’ and officers’ liability insurance and property and general liability insurance. This insurance or other insurance we may elect to obtain may not be or remain available to us or be obtainable by us at commercially reasonable rates, and the amount of our coverage may not be adequate to cover any liability we incur. Future increases in insurance costs, coupled with the increase in deductibles, will result in higher operating costs and increased risk. If we were to incur substantial liability and such damages were not covered by insurance or were in excess of policy limits, or if we were to incur such liability at a time when we were not able to obtain liability insurance, our business, results of operations and financial condition could be materially adversely affected.
Risks Related to Our Securities
Our Restated Certificate of Incorporation, as amended (our “Certificate of Incorporation”), and our Bylaws (our “Bylaws”), as well as the DGCL and certain regulations, could discourage or prohibit acquisition bids or merger proposals, which may adversely affect the market price of our Common Stock.
Provisions of our Certificate of Incorporation and Bylaws and the DGCL may discourage, delay or prevent a merger, acquisition, or other change in control that stockholders may consider favorable, including transactions in which our stockholders might otherwise receive a premium for their shares of our Common Stock. These provisions may also prevent or frustrate attempts by our stockholders to replace or remove our management.
In addition, Section 203 of the DGCL prohibits a publicly-held Delaware corporation from engaging in a business combination with an interested stockholder, which generally refers to a person which together with its affiliates owns, or within the last three years has owned, 15 percent or more of our voting stock, for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner.
The existence of the foregoing provisions and anti-takeover measures could limit the price that investors might be willing to pay in the future for shares of Common Stock. They could also deter potential acquirers of our company, thereby reducing the likelihood that our stockholders could receive a premium for their Common Stock in an acquisition.
For so long as any shares of Series B Preferred Stock remain outstanding, the majority holders of the Series B Preferred Stock are entitled to designate one individual to be nominated to serve as a director on our board of directors.
For so long as any shares of Series B Preferred Stock remain outstanding, the majority holders of the Series B Preferred Stock (or the Majority Holders) will be entitled to designate one (1) individual to be nominated to serve as a director (who we refer to as the Series B Preferred Director) on our board of directors (or the Board). At each annual meeting of the stockholders of our company, or at any special meeting called for the purpose of electing directors, the Board shall nominate such designee for election. Unless the Board shall have received from the Majority Holders a written designation by March 1 of each calendar year of an individual other than the then-sitting Series B Preferred Director, the Board shall nominate the then-sitting Series B Preferred Director for re-election to the Board. The Series B Preferred Director is subject to any board of directors-related provisions that may be contained in our Certificate of Incorporation or Bylaws. The Majority Holders, voting as a single class at a meeting called for such purpose (or by written consent signed by the Majority Holders in lieu of such a meeting), have the sole right to remove the Series B Preferred Director from the Board. Any vacancy created by the removal, resignation or death of a Series B Preferred Director may solely be filled by the Majority Holders, voting as a single class, at a meeting called for such purpose (or by written consent signed by the Majority Holders in lieu of such a meeting). The Series B Preferred Director shall be entitled to receive similar compensation, benefits, reimbursement (including of reasonable travel expenses), indemnification and insurance coverage for his or her service as a director of our company as the other non-employee directors of on the Board. The initial Series B Preferred Director is Mr. James P. Cassidy. As of the date of this Report, the seat on our Board designated for the Series B Preferred Director is vacant due to Mr. Cassidy’s resignation from the Board on January 25, 2024. As a result of their Board appointment right, the Majority Holders could have a disproportionate impact on our governance and operations, which could have an adverse effect on our company.
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The Series B Preferred Stock ranks senior to our Common Stock.
The Series B Preferred Stock ranks, with respect to dividend rights, rights on the distribution of assets on any voluntary or involuntary liquidation, dissolution or winding up of the affairs of our company, and redemption rights, senior to the Common Stock and each other class or series of securities now existing or hereafter authorized classified or reclassified, the terms of which do not expressly provide that such class or series ranks on a parity basis with or senior to the Series B Preferred Stock as to dividend rights, rights on the distribution of assets on any voluntary or involuntary liquidation, dissolution or winding up of the affairs of our company, and redemption rights.
Future offerings of debt or equity securities may rank senior to our Common Stock.
We have a present need for additional capital, and we will likely continue to seek to raise new funding from time to time through the issuance of debt or equity securities. Our Board of Directors has the ability, without further approval of our stockholders, to issue debt or equity securities in the future, in addition to the Series B Preferred Stock, ranking senior to our Common Stock or otherwise incur additional indebtedness, it is possible that these securities or indebtedness will be governed by an indenture or other instrument containing covenants restricting our operating flexibility and limiting our ability to pay dividends to stockholders. Additionally, any convertible or exchangeable securities that we issue in the future may have rights, preferences, and privileges, including with respect to dividends, more favorable than those of our Common Stock and may result in dilution (perhaps significant) to our stockholders. Because our decision to issue debt or equity securities in any future offering or otherwise incur indebtedness will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing, or nature of our future offerings or financings, any of which could reduce the market price of our Common Stock and dilute its value.
We may issue additional classes or series of preferred stock whose terms could adversely affect the voting power or value of our commons stock.
Our Certificate of Incorporation authorizes us to issue, without the approval of our stockholders, one or more classes or series of preferred stock having such designations, preferences, limitations, and relative rights, including preferences over our Common Stock respecting dividends and distributions, as our Board may determine. The terms of one or more additional classes or series of preferred stock could adversely impact the voting power or value of our Common Stock. For example, we might grant holders of preferred stock the right to elect some number of our directors in all events or on the happening of specified events or the right to veto specified transactions. Similarly, the repurchase or redemption rights or dividend or liquidation preferences we might assign to holders of preferred stock could affect the residual value of our Common Stock.
The market price for our Common Stock is volatile and has and will fluctuate.
The market price for shares of our Common Stock may be volatile and subject to wide fluctuations in response to numerous factors, many of which are beyond our control, including the following: (i) action by the FDA with respect to Bidi’s PMTAs or regulatory action by FDA generally against Bidi, our company or our industry, (ii) actual or anticipated fluctuations in our quarterly financial results; (iii) recommendations by securities research analysts; (iv) changes in the economic performance or market valuations of other issuers that investors deem comparable to ours; (v) addition or departure of our executive officers or members of our Board and other key personnel; (vi) release or expiration of lock-up or other transfer restrictions on outstanding shares of Common Stock; (vii) sales or perceived sales of additional shares of our Common Stock; (viii) the liquidity of our Common Stock or lack thereof; (ix) significant acquisitions or business combinations, strategic partnerships, joint ventures, or capital commitments by or involving us or our competitors; and (x) news reports relating to trends, concerns, technological or competitive developments, regulatory changes, and other related issues in our industry or target markets. Financial markets often experience significant price and volume fluctuations that affect the market prices of equity securities of public entities and that are, in many cases, unrelated to the operating performance, underlying asset values or prospects of such entities. Accordingly, the market price of our shares of Common Stock may decline even if our operating results, underlying asset values or prospects have not changed.
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Our Common Stock is listed on the Nasdaq but there can be no assurance that we will be able to comply with the continued listing standards of Nasdaq in the future, particularly since we are presently experiencing a Nasdaq continuing listing deficiency.
Although our Common Stock is listed on Nasdaq, we cannot assure you that we will be able to comply with the standards that we are required to meet in order to maintain a listing of our Common Stock on Nasdaq in the future. Nasdaq listing rules require us to maintain certain closing bid price, stockholders’ equity, and other financial metric criteria, as well as certain corporate governance requirements, for our Common Stock to continue trading on Nasdaq. If we fail to comply with the continued listing standards, our Common Stock could be delisted.
We have been subject to Nasdaq listing deficiency issues in the past. On January 26, 2022, Nasdaq notified us that we were not in compliance with the requirement to maintain a minimum closing bid price of $1.00 per share, as set forth in Nasdaq Listing Rule 5550(a)(2) (the “Bid Price Rule”), because the closing bid price of our Common Stock was below $1.00 per share for 30 consecutive business days. While this listing deficiency was cured, on January 30, 2023, Nasdaq again notified us that we were not in compliance with the Bid Price Rule given that our Common Stock had traded at below $1.00 for 30 consecutive business days. While we regard compliance with the Bid Price Rule as of February 8, 2024 as a result of our January 2024 reverse stock split, we remain subject to the risk that our Common Stock price could again fall below $1.00 and we may again become subject to delisting for failure to comply with the Bid Price Rule.
Moreover, on November 7, 2023, we received written notice from Nasdaq stating that we failed to hold an annual meeting of shareholders within twelve (12) months after our fiscal year ended on October 31, 2022, as required by Nasdaq Listing Rule 5620(a) (or the Annual Meeting Listing Rule). We submitted a plan of compliance to Nasdaq and have been granted until April 29, 2024 to hold our annual meeting.
There can be no assurances given that we will be able to cure any listing deficiencies related to our company. A failure to maintain listing on Nasdaq could have a material adverse effect on the liquidity and price of our Common Stock.
Future sales of shares of our Common Stock by our controlling shareholder or by our officers and directors may negatively impact the market price for our Common Stock.
Subject to compliance with applicable securities laws, our controlling shareholder Kaival Holdings as well as our directors and officers and their affiliates may sell some or all of their shares of our Common Stock in the future. No prediction can be made as to the effect, if any, such future sales of shares of our Common Stock may have on the market price of the shares of our Common Stock prevailing from time to time. However, the future sale of a substantial number of shares of our Common Stock by our directors and officers and their affiliates, or the perception that such sales could occur, could adversely affect prevailing market prices for our shares of our Common Stock.
The concentration of ownership by Kaival Holdings and our officers and directors may result in conflicts of interest and may prevent other stockholders from influencing significant corporate decisions and depress our stock price.
Based on the number of shares outstanding as of as of the date of this Report, Kaival Holdings, our affiliated majority stockholder, together with our officers and directors, beneficially own a combined total of approximately 68,64% percent of our outstanding Common Stock, including shares of our Common Stock subject to stock options that are currently exercisable or are exercisable and that vest within 60 days as of the date of this prospects. If our controlling stockholder, together with these officers and directors act together, they will be able to exert a significant degree of influence over our management and affairs and control matters requiring stockholder approval, including the election of directors and approval of mergers, business combinations, or other significant transactions. In particular, the interests of Kaival Holdings (which is controlled by Nirajkumar Patel, our Chief Science and Regulatory Officer and director) may not always coincide with our interests or the interests of other stockholders, which could cause Mr. Patel to become subject to conflicts of interests which may not be resolved in favor of our minority stockholders. Mr. Patel also controls Bidi, our principal commercial partner, as well as the entity that is the landlord of our principal officer and warehouse, all of which creates the potential for conflicts of interest for Mr. Patel. For example, Kaival Holdings, together with our officers and directors, could cause us to enter into transactions or agreements that we would not otherwise consider or might not be in the best interests of our minority stockholders. Similarly, this concentration of ownership may have the effect of delaying or preventing a change in control of our company otherwise favored by our other stockholders. This, in turn, could have a negative effect on the market price of our Common Stock. It could also prevent our stockholders from realizing a premium over the market price for their shares of our Common Stock. The concentration of ownership also may contribute to the low trading volume and volatility of our Common Stock. Moreover, any such conflicts of interests may not be easy to resolve and could impair our ability to operate our business.
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Our Common Stock may become the target of a “short squeeze.”
Beginning in 2021, the securities of several companies have increasingly experienced significant and extreme volatility in stock price due to short sellers of shares of Common Stock and buy-and-hold decisions of longer investors, resulting in what is sometimes described as a “short squeeze.” Short squeezes have caused extreme volatility in those companies and in the market and have led to the price per share of those companies trading at a significantly inflated rate that is disconnected from the underlying value of the company. Sharp rises in a company’s stock price may force traders in a short position to buy stock to avoid even greater losses. Many investors who have purchased shares in those companies at an inflated rate face the risk of losing a significant portion of their original investment as the price per share has declined steadily as interest in those stocks has abated. We may be a target of a short squeeze, and investors may lose a significant portion or all their investment if they purchase our shares at a rate that is significantly disconnected from our underlying value.
If securities or industry analysts fail to continue publishing research about our business, if they change their recommendations adversely or if our results of operations do not meet their expectations, our stock price and trading volume could decline.
The trading market for our Common Stock will be influenced by the research and reports that industry or securities analysts publish about us or our business. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline. In addition, it is likely that in some future period our operating results will be below the expectations of securities analysts or investors. If one or more of the analysts who cover us downgrade our Common Stock, or if our results of operations do not meet their expectations, our stock price could decline.
We do not currently pay dividends on our shares of Common Stock and have no intention of paying dividends on shares of our Common Stock for the foreseeable future.
No dividends on the shares of our Common Stock have been paid by us to date. We do not intend to declare or pay any cash dividends in the foreseeable future. Payment of any future dividends will be at the discretion of our Board, after considering a multitude of factors appropriate in the circumstances, including our operating results, financial condition, and current and anticipated cash needs. In addition, the terms of any future debt or credit facility may preclude us from paying any dividends unless certain consents are obtained, and certain conditions are met. There is no assurance that future dividends will be paid, and, if dividends are paid, there is no assurance with respect to the amount of any such dividend. Unless our Board decides to pay dividends, our stockholders will be required to look at appreciation of our Common Stock to realize a gain on their investment. There can be no assurance that this appreciation will occur.
For as long as we are an “emerging growth company” we intend to take advantage of reduced disclosure and governance requirements applicable to emerging growth companies, which could result in our Common Stock being less attractive to investors and could make it more difficult for us to raise capital as and when we need it.
We are an “emerging growth company,” as defined in the JOBS Act, and we have taken advantage, and intend to continue to take advantage, of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”), reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a non-binding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.
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Investors may find our Common Stock less attractive because we rely on these exemptions, which could contribute to a less active trading market for our Common Stock or volatility in our share price. In addition, we may be less attractive to investors, and it may be difficult for us to raise additional capital when we need it. Investors may be unable to compare our business with other companies in our industry if they believe that our financial accounting is not as transparent as other companies in our industry. If we are unable to raise additional capital as and when we need it, our financial condition and results of operations may be materially and adversely affected.
We may take advantage of these reporting exemptions until we are no longer an emerging growth company.
We have identified material weaknesses in our system of internal controls over financial reporting and, if we cannot remediate these material weaknesses, we may not be able to accurately report our financial condition, results of operations, or cash flows, which may adversely affect investor confidence in us and, as a result, the value of our Common Stock.
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting that results in more than a reasonable possibility that a material misstatement of annual or interim financial statements will not be prevented or detected on a timely basis. Section 404 of Sarbanes-Oxley also generally requires an attestation from our independent registered public accounting firm on the effectiveness of our system of internal controls over financial reporting. However, if we remain an emerging growth company as defined in the JOBS Act, we intend to take advantage of the exemption permitting us not to comply with the independent registered public accounting firm attestation requirement.
Our management has identified, and we have disclosed, certain material weaknesses in our system of internal controls over financial reporting as of our fiscal year ended October 31, 2023. Specifically, our management has found that our internal control system over financial reporting was ineffective as of October 31, 2023, based on a determination that there was a lack of sufficient resources to provide adequate 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.
To address these material weaknesses, and subject to the receipt of additional financing or cash flows, we have undertaken, and intend to continue to undertake, remediation measures to address such material weaknesses, including implementing prevent and detect internal control procedures pursuant to which we can ensure segregation of duties and hire additional resources to ensure appropriate review and oversight.
Our compliance with Section 404 of Sarbanes-Oxley will require that we incur substantial accounting expenses and spend significant management efforts. We may not be able to complete our evaluation, testing, and any required remediation in a timely fashion. During the evaluation and testing process, if we identify one or more material weaknesses in our internal control over financial reporting, we will be unable to assert that our system of internal control over financial reporting is effective. We cannot assure you that there will not be material weaknesses or significant deficiencies in our internal control over financial reporting in the future. Any failure to maintain internal control over financial reporting could severely inhibit our ability to accurately report our financial condition, results of operations, or cash flows. This may expose us, including individual executives, to potential liability which could significantly affect our business.
We cannot assure you that we will, in the future, identify areas requiring improvement in our system of internal controls over financial reporting. We cannot assure you that the measures we will take to remediate any areas in need of improvement will be successful or that we will implement and maintain adequate controls over our financial process and reporting in the future as we continue to grow. If we are unable to establish appropriate internal financial reporting controls and procedures, if we are unable to conclude that our system of internal controls over financial reporting is effective, or if our independent registered public accounting firm determines we have a material weakness or significant deficiency in our system of internal controls over financial reporting once that firm begins its audits of our systems of internal controls over financial reporting, it could cause us to fail to meet our reporting obligations, result in the restatement of our financial statements, harm our operating results, cause investors to lose confidence in the accuracy and completeness of our financial reports, the market price of our common shares could decline, and we could be subject to sanctions or investigations by Nasdaq, the SEC, or other regulatory authorities. Failure to remedy any material weakness in our system of internal controls over financial reporting, or to implement or maintain other effective internal control systems required of public companies, could also restrict our future access to the capital markets.
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Our disclosure controls and procedures may not prevent or detect all errors or acts of fraud.
Our disclosure controls and procedures are designed to reasonably assure that information required to be disclosed by us in reports we file or submit under the Exchange Act is accumulated and communicated to management, recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC. We believe that any disclosure controls and procedures or internal controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. As of October 31, 2023, our Chief Executive Officer and our Chief Financial Officer concluded that the disclosure controls and procedures were not effective as of such date due to material weaknesses in internal controls identified above.
These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple errors or mistakes. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by an unauthorized override of the controls. Accordingly, because of the inherent limitations in our internal controls system, misstatements, or insufficient disclosures due to error or fraud may occur and not be detected.
We have incurred, and will continue to incur, increased costs as a result of operating as a public company, and our management has been required, and will continue to be required, to devote substantial time to new compliance initiatives.
As a public company, we have incurred and are continuing to incur significant legal, accounting, and other expenses and these expenses may increase even more after we are no longer an “emerging growth company” and “smaller reporting company.” We are subject to the reporting requirements of the Exchange Act and the rules adopted, and to be adopted, by the SEC. Our management and other personnel devote a substantial amount of time to these compliance initiatives.
Moreover, these rules and regulations have substantially increased our legal and financial compliance costs and made some activities more time-consuming and costly. The increased costs can result in our reporting a net loss. These rules and regulations may make it more difficult and more expensive for us to maintain sufficient directors’ and officers’ liability insurance coverage. We cannot predict or estimate the amount or timing of additional costs we may continue to incur to respond to these requirements. The ongoing impact of these requirements could also make it more difficult for us to attract and retain qualified people to serve on our Board, our Board committees, or as executive officers.
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Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
On August 1, 2020, we began leasing office space consisting of 1,595 square feet as our main corporate office in Grant, Florida for $1,000 per month. The five-year lease agreement is with a related party, Just Pick, LLC (“Just Pick”). Nirajkumar Patel, our Chief Science and Regulatory Officer and director, is also an officer of Just Pick. We believe our office space is sufficient to meet our current needs.
On June 10, 2022, we entered into a Lease Agreement (the “2022 Lease”) with Just Pick, LLC (a related party) for approximately 21,332 rentable square feet combined in the office building and warehouse located at 4460 Old Dixie Highway, Grant-Valkaria, Florida 32949 (the “Premises”), together with all improvements thereon. Just Pick, LLC is considered a related party as it is owned by our Chief Science and Regulatory Officer and director, Nirajkumar Patel. We believe our office space is sufficient to meet our current needs. We must pay the Just Pick lease base rent equal to $17,777 per month during the first year of the lease term. Thereafter, the monthly base rent will be increased annually with a monthly base rent of $18,666 in the second year, $19,554 in the third year, $20,443 in the fourth year, $22,221 in the fifth year, $23,999 in the sixth year, and one twelfth (1/12th) of the market annual rent for the seventh through eleventh years, if appliable. In addition to the base rent, we must pay Just Pick one hundred percent (100%) of operating expenses, insurance costs, and taxes for each calendar year during the lease term.
Item 3. Legal Proceedings.
From time to time, we may become party to litigation or other legal proceedings that we consider to be a part of the ordinary course of our business. We are not currently involved in legal proceedings that could reasonably be expected to have a material adverse effect on our business, prospects, financial condition, or results of operations. To the best of our knowledge, no adverse legal activity is anticipated or threatened.
While we are not a party to the legal or regulatory proceedings involving Bidi described in Item 1 – Business – FDA PMTA and MDO Determinations, Related Court Actions and the Impact on Our Business, the outcome of those or related proceedings could have a material adverse or positive impact on our ability to operate our business given our reliance on Bidi.
Item 4. Mine Safety Disclosures.
Not applicable.
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
On July 20, 2021, our Common Stock began trading on the Nasdaq Capital Market under the trading symbol “KAVL.” On February 8, 2024, the last reported sales price of our Common Stock was $2.70.
Holders
As of February 6, we had approximately 7,400 record holders of our Common Stock.
Dividends
Our authorized Common Stock consists of 1,000,000,000 shares with a par value of $0.001 per share. There were 2,793,386 shares of Common Stock issued and outstanding as of October 31, 2023 as compared to 2,674,718 shares of the Common Stock issued and outstanding as of October 31, 2022.
Recent Sales of Unregistered Securities; Uses of Proceeds from Registered Securities
Common Stock
Our authorized Common Stock consists of 1,000,000,000 shares with a par value of $0.001 per share. There were 2,793,386 shares of Common Stock issued and outstanding as of October 31, 2023 as compared to 2,674,718 shares of the Common Stock issued and outstanding as of October 31, 2022.
During the year ended October 31, 2023, we issued 95,239 shares of Common Stock as consideration for the acquisition of intellectual property assets from GoFire. We also issued 4,381 shares of Common Stock as compensation for advisory services rendered in connection with the GoFire APA.
During the year ended October 31, 2023, we issued 19,048 shares of Common Stock as part of a loan transaction with AJB Investments entered into on August 9, 2023. Such loan has been repaid in full as of the date of this Report.
During the fiscal year ended October 31, 2022, third parties exercised warrants to purchase 40,744 shares of our Common Stock for net proceeds of $1,625,650.
During the fiscal year ended October 31, 2022, we issued 5,870 shares of Common Stock with the fair value of $172,379 to employees for services RSUs that were settled with common shares. Of the shares issued to employees, 2,130 shares were withheld by us to satisfy tax withholding obligations equal to $59,862.
During the fiscal year ended October 31, 2022, 618 shares of our Common Stock were issued to an individual as compensation for consulting services rendered to us. We issued the shares in reliance on the exemption from registration pursuant to Section 4(a)(2) of the Securities Act (in that the issuance of shares of our Common Stock did not involve any public offering).
During the fiscal year ended October 31, 2022, 731 shares of our Common Stock were issued to QuikfillRx, LLC as compensation for marketing and promotion services rendered to us. We issued the shares in reliance on the exemption from registration pursuant to Section 4(a)(2) of the Securities Act (in that the issuance of shares of our Common Stock did not involve any public offering).
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During the fiscal year ended October 31, 2022, 539 shares of our Common Stock were issued to an individual as compensation for professional legal services rendered to us. We issued the shares in reliance on the exemption from registration pursuant to Section 4(a)(2) of the Securities Act (in that the issuance of shares of our Common Stock did not involve any public offering).
During the fiscal year ended, October 31, 2022, all 3,000,000 shares of Series A Preferred Stock were converted into shares of Common Stock by Kaival Holdings, our majority stockholder. The conversion of 3,000,000 shares of Series A Preferred Stock, at a conversion rate of 0.3968, equaled 1,190,477 shares of Common Stock. As a result, the authorized, preferred stock of the Company consists of 5,000,000 shares with a par value of $0.001 per share, with 0 shares of preferred stock issued or outstanding as of October 31, 2022.
Series B Convertible Preferred Stock
We issued 900,000 shares of the Series B Preferred Stock as consideration for the acquisition of intellectual property assets from GoFire in May 2023. The Series B Preferred Stock carries no voting rights except: (i) with respect to the ability of the holders of a majority of the then outstanding Series B Preferred Stock (the “Majority Holders”), to nominate a director to our board of directors, and (ii) that the vote of the Majority Holders is necessary for effecting any amendment to the Company’s Certificate of Incorporation or Certificate of Designation that affects the Series B Preferred Stock. The Series B Preferred Stock is redeemable at our option at a redemption price of $15 per share, subject to potential downward adjustments based on the trading price of the Common Stock. Subject to additional limitations in the GoFire APA, the Series B Preferred Stock holds seniority over the Common Stock and each other class of series of securities now existing or hereafter authorized with respect to dividend rights, the distribution of assets upon liquidation, and dissolution and redemption rights. Upon a liquidation and winding up of our company, the holders of Series B Preferred Stock are entitled to a liquidation preference of $15 per share (the “Liquidation Preference”), though the redemption may be adjusted downward based on the trading price of the Common Stock at the time of liquidation. The holders of Series B Preferred Stock are entitled to receive a dividend equal to 2% of the Liquidation Preference, accruing from May 30, 2023 and payable on the eighteen-month anniversary of May 30, 2023. No preemptive rights are granted to the holders of Series B Preferred Stock. The Majority Holders have the ability to cause a voluntary conversion of the Series B Preferred Stock into Common Stock at a conversion rate of 0.3968 shares of Common Stock per share of Series B Preferred Stock which may only occur on or after the following dates 18 month, 24 month, 36, month, 48 month, and 60 month anniversary of the original issuance date; and only up to 180,000 number of shares of Series B Preferred Stock on each of the these dates. All shares of Series B Preferred Stock will automatically convert to Common Stock upon the occurrence of a Change of Control (as defined in the GoFire APA).
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
This management’s Discussion and Analysis of Financial Condition and Results of Operations is designed to provide a reader of the financial statements with a narrative report on our financial condition, results of operations, and liquidity. This discussion and analysis should be read in conjunction with the audited Financial Statements and notes thereto for the year ended October 31, 2023, included under Item 8 – Financial Statements and Supplementary Data in this Report. The following discussion contains forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations, and intentions. Our actual results could differ materially from those discussed in the forward-looking statements. Please also see the cautionary language at the beginning of this Report regarding forward-looking statements.
Overview
Our business is focused on the sales, marketing and distribution of ENDS products, also known as “e-cigarettes”, in a variety of favors. Our primary product is the Bidi® Stick as well as other products manufactured by our affiliate Bidi. We hold the exclusive worldwide right to market and distribute the Bidi® Stick and certain other products manufactured by Bidi. We intend to drive revenue growth primarily through wholesale and traditional retail channels, including convenience stores.
Pursuant to the A&R Distribution Agreement, Bidi granted us an exclusive worldwide right to distribute Bidi’s ENDS and related components (as more particularly set forth in the A&R Distribution Agreement and referred to herein as the products) for sale and resale to both retail level customers and non-retail level customers. Currently, the products consist solely of the “BIDI® Stick”, Bidi’s disposable, tamper resistant ENDS product made with medical-grade components, a UL-certified battery and technology designed to deliver a consistent vaping experience for adult smokers 21 and over. We presently distribute products to wholesalers and retailers of ENDS products, having ceased all direct-to-consumer sales in February 2021. Nirajkumar Patel, our Chief Science and Regulatory Officer and director and an indirect controlling stockholder of our company, owns Bidi.
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BIDI® Stick comes in a variety of flavor options for adult cigarette smokers. We do not manufacture any of the products we resell. The BIDI® Stick is manufactured by Bidi. Pursuant to the terms of the A&R Distribution Agreement, Bidi provides us with all branding, logos, and marketing materials to use with our commercial partners in connection with our marketing and promotion of the products.
We process all sales made only to non-retail customers, with all sales to non-retail customers made through Bidi’s age-restricted website, www.wholesale.bidivapor.com. We ceased all direct-to-consumer sales in February 2021 in order to better ensure youth access prevention and to comply with the Prevent All Cigarette Trafficking (or PACT) Act. We provide all customer service and support at our own expense through QuikfillRx as described below. We set the minimum prices for all sales made by us. We maintain adequate inventory levels of products in order to meet the demands of our non-retail customers and deliver the products sold to these customers.
A key third party collaborator of ours is QuikfillRx, which does business as “Kaival Marketing Services” to reflect its contributions to our company. QuikfillRx provides us with certain services and support relating to sales management, website development and design, graphics, content, public communication, social media, management and analytics, and market and other research. QuikfillRx provides these services to us pursuant to a Services Agreement, most recently amended on November 9, 2022, which has a current term ending on October 31, 2025 (subject to potential one-year extensions) and pursuant to which QuikfillRx receives monthly cash compensation and was granted certain equity compensation in the form of options.
We have also maintain key international licensing agreements with Philip Morris and its affiliates as described under Item 1 – Business.
Material Items, Trends and Risks Impacting Our Business
We believe that the following items and trends may be useful in better understanding the results of our operations.
Dependence on Bidi and Nirajkumar Patel
We are wholly dependent on Bidi to supply the BIDI® Sticks to us for distribution. Accordingly, any supply or other issues that impact Bidi indirectly impact us and our ability to operate our business. Moreover, and while we are seeking to diversify our product offerings, the loss of our relationship with Bidi would substantially harm the viability of our business, which constitutes an on-going risk factor to our business.
Bidi is controlled by Nirajkumar Patel, our Chief Science and Regulatory Officer and a director of our company. Moreover, Kaival Holdings, an entity controlled by Mr. Patel, is our majority stockholder. In addition, our corporate headquarters is leased to us by an affiliate of Mr. Patel. Therefore, Mr. Patel has the power and ability to control or influence our business. As of October 31, 2023 our company had an accounts payable to Mr. Patel and Bidi in the amount of $2,474,817.
Dependence on QuikfillRx, LLC and Distributors
We are substantially dependent on QuikfillRx, LLC (d/b/a Kaival Marketing Services, or KMS) to provide key marketing, sales and other support services to us. In addition, we rely on third-party brokers and distributors to introduce and place our products into our historic foundation of convenience stores and more recently into new retail channels, including dollar, grocery and mass-merchandisers. The loss of one or more of these key relationships would have a material adverse effect on our business.
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PMI Licensing Agreement and International Distribution
On June 13, 2022, we, through our wholly owned subsidiary, KBI, entered into the PMI License Agreement with PMPSA, a wholly owned affiliate of PMI, for the development and distribution of ENDS products in certain markets outside of the United States, subject to market (or regulatory assessment). The PMI License Agreement grants to PMPSA a license of certain intellectual property rights relating to Bidi’s ENDS device, known as the BIDI® Stick in the United States, as well as potentially newly developed devices, to permit PMPSA to manufacture, promote, sell, and distribute such ENDS device and newly developed devices, in international markets, outside of the United States.
On July 25, 2022, we announced the launch of PMPSA’s custom-branded self-contained e-vapor product, pursuant to the licensing agreement. The product, a self-contained e-vapor device initially called VEEBA and more recently rebranded as VEEV NOW, has been custom developed and was initially distributed in Canada. VEEV NOW was then commercially launched by PMPSA in Europe in February 2023, with additional market launches planned this year. On August 12, 2023, we executed and entered into a Deed of Amendment No. 1 (the “PMI License Amendment”) with PMPSA, Bidi and KBI. Pursuant to the PMI License Amendment (which was effective on June 30, 2023), resulting in a Net Reconciliation Payment to KBI and ongoing quarterly royalty payments.
The ability of PMPSA to generate sales of its licensed products is important to our results of operations since we derive royalty revenue from PMPSA sales. Should our relationship with PMPSA deteriorate or terminate, or if PMPSA is unable to generate meaningful sales of its licensed products, our business and results of operations would be materially harmed.
Ability to Develop and Monetize the GoFire Intellectual Property
We purchased certain vaporizer and inhalation-related technology from GoFire in May 2023 with the goal of diversifying our business and lessening our dependence on BIDI. We do not expect that the acquired assets will generate immediate revenue for us, and while we believe this to be a transformative acquisition for us and we are already seeking to develop and monetize the acquired assets, we can give no assurances at this time that either (i) the patent applications we acquired will eventuate in issued patents or (ii) we will be able to enter into successful monetizing arrangements with respect to these assets.
Nature of our Products and Regulation
Our products (including both our core Bidi Stick products and any products that we may develop from the GoFire assets) are and will be heavily regulated by the FDA, which has broad regulatory powers. As described under Item 1 – Business – FDA PMTA and MDO Determinations, Related Court Actions and the Impact on Our Business, the outcome FDA actions and related proceedings against or by Bidi (including the January 2024 MDO regarding Classic Bidi Sticks) could have a material adverse impact on our ability to operate our business given our reliance on Bidi. In addition to the de facto FDA flavor ban that has resulted from the denial of nearly all PMTAs for flavored ENDS, ENDS products that are non-tobacco flavored continue to face the threat of prohibition at the local level, as many state and local authorities and attorneys general push for bans or request the FDA to deny PMTAs for flavored ENDS. In addition, a number of states and localities have banned the sale of non-tobacco flavored tobacco products. For example, in November 2022 California passed Proposition 31, which prohibits the sale of non-tobacco flavored tobacco products, including e-cigarettes, in retail locations. Thus, the non-tobacco flavored BIDI® Sticks are not permitted to be sold in California retail locations. We anticipate more states and localities will take this approach. Several other states have banned flavored ENDS, including New York, New Jersey, Rhode Island, and Massachusetts, with several more considering similar bans (e.g., Maryland, and Connecticut).
Also, competition in the market for e-cigarettes from illicit sources may have an adverse effect on our overall sales volume, restricting our ability to increase selling prices and damaging our brand equity and reputation. Illicit trade and tobacco trafficking in the form of counterfeit products, smuggled genuine products, and locally manufactured products on which applicable taxes or regulatory requirements are evaded, represent a significant and growing threat to the legitimate tobacco industry, including the Bidi products we sell.
In addition, the market for ENDS products is subject to a great deal of uncertainty and is still evolving. ENDS products, having recently been introduced to market over the past 10 to 15 years, are at a relatively early stage of development, and represent core components of a market that is evolving rapidly, highly regulated, and characterized by a number of market participants. Rapid growth in the use of, and interest in, ENDS products is recent, and may not continue on a lasting basis. With respect to the GoFire assets, the underlying technology touches on hemp/cannabis, nutraceutical and healthcare applications in addition to nicotine, all of which are heavily regulated by the FDA and other federal and state agencies. The demand and market acceptance for all of these products is subject to a high level of uncertainty. Therefore, we are subject to all the business risks associated with a new enterprise in an evolving market.
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Some of our product offerings through Bidi are subject to developing and unpredictable regulation. Our products are sold through our distribution network and may be subject to uncertain and evolving federal, state, and local regulations, including hemp, non-THC cannabidiol (CBD) and other non-tobacco consumable products. Enforcement initiatives by those authorities are therefore unpredictable and impossible to anticipate. We anticipate that all levels of government, which have not already done so, are likely to seek in some way to regulate these products, but the type, timing, and impact of such regulations remains uncertain. With respect to CBD in particular, on January 26, 2023, the FDA announced that it would not initiate rulemaking to regulate CBD as a dietary food ingredient. Rather, after careful review, the FDA has concluded that a new regulatory pathway for CBD is needed and has further indicated that it is prepared to work with Congress to create a new regulatory pathway for CBD through legislation.
Ability to Meet Demand for our Products
Increased demand for our products and have opened new distribution channels for us through which we can sell our products. However, a sharp increase in demand for products will require us to use cash and/or obtain financing in order to purchase products from Bidi for resale in the marketplace. As a result, we are faced with the risk that such cash or financing will not be available in sufficient amounts or on terms acceptable to us (or at all) to meet the market demand for products. Our inability to fulfill this demand will damage our reputation and could materially impact on our ability to increase sales of products which, in turn, would adversely impact the results of our operations.
Inflation
Consumer purchases of tobacco products are historically affected by economic conditions, such as changes in employment, salary and wage levels, the availability of consumer credit, inflation, interest rates, fuel prices, sales taxes, and the level of consumer confidence in prevailing and future economic conditions. The U.S. has been experiencing an environment of material inflation in recent quarters, and this condition may impact discretionary consumer purchases, such as the BIDI® Stick. Demand for our products may also decline during recessionary periods or at other times when disposable income is lower, and taxes may be higher.
Supply Chain
The spread of COVID-19 throughout the world as well as increasing tensions with China over the past several years and Russia’s February 2022 invasion of Ukraine has created global economic uncertainty, which may cause partners, suppliers, and potential customers to closely monitor their costs and reduce activities. Any of the foregoing could materially adversely affect the supply chain for Bidi and our products, and any supply chain distribution for products could have a materially adverse effect on the results of operations.
Going Concern
Our financial statements are prepared in accordance with U.S. GAAP applicable to a going concern, which contemplates realization of assets and the satisfaction of liabilities in the normal course of business within one year after the date the consolidated financial statements are issued.
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In accordance with Financial Accounting Standards Board (or FASB), Accounting Standards Update (or ASU) No. 2014-15, Presentation of Financial Statements – Going Concern (Subtopic 205-40), our management evaluates whether there are conditions or events, considered in aggregate, that raise substantial doubt about our ability to continue as a going concern within one year after the date that the financial statements are issued.
As shown in the accompanying consolidated financial statements, we will need significant additional funds to satisfy our outstanding payables, fund our working capital, and fully implement our business plan as we seek to grow our revenues and ultimately achieve positive cash flow and profitability. In addition, our ability to continue as a going concern is adversely affected by the uncertainty surrounding Bidi’s PMTA process with FDA and outcome of Bidi’s petition with the 11th Circuit Court of Appeals regarding the FDA’s January 2024 MDO relating to Classic Bidi® Stick as well as our negative cash flows from operations, significant recurring losses and present need for additional funding. All of these factors raise substantial doubt regarding our ability to continue as a going concern.
Our management plans to continue similar operations with increased marketing and enhanced efforts to increase sales, which we believe will result in increased revenue and ultimately net income and positive cash flow from operations.
However, there is no assurance that our plans will be able to generate expected or greater amounts of revenues or ever achieve profitability due to the factors listed above as well as the regulation and public perception of ENDS products and the various other risks we face. The accompanying consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of these or other risks or uncertainties.
Liquidity and Capital Resources
We believe we will not have sufficient cash on hand as of the date of this Report to support our operations for at least 12 months. As of October 31, 2023, we had working capital of approximately $2 million and total cash of approximately $0.5 million. As discussed above, this condition and other factors raise substantial doubt regarding our ability to continue as a going concern.
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 several factors that could result in the need to raise additional funds, including a decline in revenue, a lack of anticipated sales growth, increased costs and our potential plan to redeem for cash the shares of our Series B Preferred Stock issued in connection with our GoFire asset purchase in May 2023. Our efforts are directed toward generating positive cash flow and, ultimately, profitability. As our efforts during our fiscal 2023 and since have not generated positive cash flows, we will need to raise additional capital. Should capital not be available to us at reasonable terms, other actions will become necessary, including implementing cost control measures and additional efforts to increase sales. We may also be required to take more strategic actions such as exploring strategic options for the sale of our company, the creation of joint ventures or strategic alliances under which we will pursue business opportunities, or other alternatives. We believe we have, or have access to, the financial resources to weather the impacts of the FDA’s PMTA process and Bidi’s receipt of MDOs from the FDA in 2021 and 2024, which are subject to additional FDA action and ongoing court proceedings, respectively. However, we will require further financing for the next twelve months, given our operating results.
Cash Flows:
Net cash flows used in operations was approximately $3.0 million for fiscal year ended 2023, compared to cash flow used in operations of approximately $5.7 million for fiscal year ended 2022. The decrease in cash flows used in operations for the fiscal year ended 2023 compared to the fiscal year ended 2022 was primarily due to changes in Other receivable – related party, Income tax receivable, and Accounts payable – related party (such related party being our affiliate, Bidi, as described further below under Results of Operations).
Net cash flows used in investing activities was $315,769 for the fiscal year ended 2023, compared to zero cash flow used in investing activities for the fiscal year ended 2022. The cash used in investing activities for the fiscal year ended 2023 consisted of cash used for the purchase of warehouse equipment and used for the transaction acquisition costs associated with the purchase of the GoFire, intellectual property.
Net cash flows provided by financing activities was $136,789 for the fiscal year ended 2023, compared to $1.6 million provided by financing activities for the fiscal year ended 2022. The cash provided by financing activities for the fiscal year ended 2023 consisted primarily of short-term financing.
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Results of Operations
Fiscal year ended October 31, 2023, compared to fiscal year ended October 31, 2022
Revenues:
Revenues for fiscal year 2023 were approximately $13.1 million, compared to approximately $12.8 million in fiscal year 2022. Revenues slightly increased in fiscal year 2023, primarily due to royalties received from PMPSA.
Cost of Revenue, Net and Gross Profit (Loss):
Gross profit in fiscal year 2023 was approximately $2.6 million, compared to approximately $1.2 million for fiscal year 2022. Total cost of revenue was approximately $10.5 million for fiscal year 2023, compared to approximately $11.5 million for fiscal year 2022. The increase in gross profit volume is primarily driven by the decrease in cost of revenue.
Operating Expenses:
Total operating expenses were approximately $13.2 million for fiscal year 2023, compared to approximately $15.6 million for fiscal year 2022. For the fiscal year 2023, operating expenses consisted primarily of advertising and promotion fees of approximately $2.5 million, stock option compensation expense of approximately $3.2 million, professional fees of approximately $2.7 million, salaries and wages of $2.0 million, and all other general and administrative expenses of approximately $2.0 million. In fiscal year 2022, operating expenses consisted primarily of advertising and promotion fees of approximately $2.7 million, stock option compensation expense of approximately $6.0 million, professional fees of approximately $3.2 million, salaries and wages of $1.7 million, and all other general and administrative expenses of approximately $2.0 million. We expect future operating expenses to increase as we seek to generate increased sales growth and invest in our infrastructure to support the planned business growth.
Income Taxes:
We have Federal net operating loss (“NOL”) carryforwards of approximately $23.8 million and state NOL carryforwards of approximately $186 thousand. With the changes instituted by the CARES Act, the Federal NOLs have an indefinite life and will not expire. Our federal and state tax returns for the 2021 and 2022 tax years generally remain subject to examination by U.S. and various state authorities. A valuation allowance is recorded to reduce the deferred tax asset if, based on the weight of the evidence, it is more likely than not that some portion or all the deferred tax assets will not be realized. Management determined that a valuation allowance of approximately $7.3 million for the year ended on October 31, 2023, was necessary to reduce the deferred tax asset to the amount that will more likely than not be realized.
Please refer to Note 10, Income Tax, in the Notes to the Consolidated Financial Statements in this Report for additional information related to our income taxes.
Net Loss:
Net loss for fiscal year 2023 was approximately $11.1 million, or $(4.13) basic and diluted net loss per share, compared to a net loss of approximately $(14.4) million, or $(7.60) basic and diluted net loss per share, for fiscal year 2022. The decrease in net loss for the fiscal year 2023, as compared to net loss in fiscal year 2022, is attributable to the revenues and expenses factors noted above. Weighted-average Common Stock outstanding were 2,721,080 on October 31, 2023, as compared to 1,890,971 on October 31, 2022. The increase in the weighted-average shares in fiscal year 2023 was primarily attributable to the issuance of 118,668 shares of Common Stock.
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Accrued Expenses:
During fiscal year 2023, we accrued approximately $81,300 for two quarterly bonuses and approximately $58,400 for approved expenses payable to QuikfillRx based on our applicable gross quarterly sales for the six months ended October 31, 2023. During fiscal year 2022, we accrued approximately $33,900 for a quarterly bonus and approximately $18,000 for approved expenses payable to QuikfillRx based on our applicable gross quarterly sales for the three months ended October 31, 2022. Excise taxes totaling approximately $5,800 were accrued based on taxable sales during the fourth quarter of fiscal year 2023, compared to excise taxes of approximately $6,600 that were accrued in fiscal year 2022 based on taxable sales during the fourth quarter of fiscal year 2022.
Concentrations:
Financial instruments, which potentially subject us to concentrations of credit risk, consist primarily of purchases of inventories, accounts payable, accounts receivable, and revenue.
Concentration of Purchases and Accounts Payable- Related Party:
For the year ended October 31, 2023, 100% of the inventories of products, consisting solely of the BIDI® Stick, were purchased from Bidi, a related party company that is owned by Nirajkumar Patel, our Chief Science and Regulatory Officer and director, in the amount of approximately $12.8 million, as compared to $1.5 million for the year ended October 31, 2022.
On October 31, 2023, a credit of $3.0 million was applied from the related-party receivable balance to the related part accounts payable balance. After this was applied, we had no related party receivable balance. As of October 31, 2023, the related party accounts payable balance related to purchases of inventories was $1.5 million. There was no related party accounts payable balance as of October 31, 2022. As of October 31,2022, we had a related party receivable balance due from Bidi of $3,704,132 of which $1,539,486 and $2,164,646 were classified as current and non-current respectively.
Concentration of Revenues and Accounts Receivable:
For the fiscal year 2023, (i) approximately 15% of the revenue from the sale of Products, solely consisting of the BIDI® Stick, was generated from GPM Investments, LLC in the amount of approximately $2.0 million, (ii) approximately 14% from H.T. Hackney Co in the amount of $1.8 million, (iii) approximately 14% from FAVS Business, LLC in the amount of $1.8 million, (iv) approximately 13% from C Store Master in the amount of $1.8 million, and (v) approximately 11% from QuikTrip Corporation in the amount of $1.5 million. For the fiscal year 2022, (i) approximately 31% of the revenue from the sale of Products, solely consisting of the BIDI® Stick, was generated from Favs Business in the amount of approximately $3.9 million, (ii) approximately 15% of the revenue from the sale of the Products was generated from H.T. Hackney Co. in the amount of approximately $1.9 million, and (iii) approximately 12% of the revenue from the sale of Products, solely consisting of the BIDI Stick, was generated from GPM, in the amount of approximately $1.5 million.
FAVS Business LLC with an outstanding balance of approximately $302,000, C Store Master with an outstanding balance of approximately $301,000, and QuikTrip Corporation with an outstanding balance of approximately $165,000 accounted for approximately 35%, 35%, and 19% of the total accounts receivable from customers, respectively, as of October 31, 2023. Favs Business with an outstanding balance of approximately $375,000 and QuikTrip Corporation, with an outstanding balance of approximately $85,000, accounted for approximately 65% and 15% of the total accounts receivable from customers, respectively, as of October 31, 2022.
Cash and cash equivalents
We consider all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. There were no cash equivalents on October 31, 2023, or October 31, 2022. Cash on October 31, 2023, and October 31, 2022, were $0.5 million and $3.7 million, respectively.
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Critical Accounting Policies and Estimates
Our financial statements are prepared in accordance with generally accepted accounting principles in the United States, (“GAAP”). The preparation of the consolidated financial statements in conformity with GAAP requires our management to make a number of estimates and assumptions relating to the reported amounts of assets and liabilities, the disclosure or inclusion of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses during the period. We evaluate our significant estimates on an ongoing basis, including, but not limited to, estimates related to allowance for doubtful accounts, and income tax provisions. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about carrying value of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates.
We believe that the assumptions associated with our revenue recognition have the greatest potential impact on our financial statements. Therefore, we consider this to be our only critical accounting policy and we do not consider any of our estimates to be critical accounting estimates.
However, we consider Revenue Recognition the most critical accounting policy for the Company that could create a material misevaluation of Product Revenue if not adhered to and implemented successfully. We 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 we generated revenues. Under ASC 606, we recognize revenue when a customer obtains control of promised goods, in an amount that reflects the consideration that we expect to receive in exchange for the goods. To determine revenue recognition for arrangements within the scope of ASC 606, we perform 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. We only apply 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.
Revenue Recognition Policy
Products Revenue
We generate product revenue from the sale of our products to non-retail customers. We recognize 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. However, when we enter a consignment agreement with a new customer, once we ship and deliver the requested amount of the products the customer ordered to it distribution center for its retail sales location, we retain ownership of the delivered products until they are delivered to their retail stores. When the products are sold in the stores and the funds, as stated in the consignment agreement, are remitted to us, then we record the revenues in our financial records. We determined that a customer obtains control of the product upon shipment when title of such product and risk of loss transfer to the customer. Our shipping and handling costs are fulfillment costs, and such amounts are classified as part of cost of sales. The advance payment is not considered a significant financing component because the period between when we transfer a promised good to a customer and when the customer pays for that good is short. We offer credit sales arrangements to non-retail (or wholesale) customers and monitor the collectability of each credit sale routinely.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
We qualify as a smaller reporting company, as defined by Item 10 of Regulation S-K and, thus, are not required to provide the information required by this Item.
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Item 8. Financial Statements and Supplementary Data.
KAIVAL BRANDS INNOVATIONS GROUP, INC.
CONSOLIDATED FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of
Kaival Brands Innovations Group, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Kaival Brands Innovations Group, Inc. and its subsidiaries (collectively, the “Company”) as of October 31, 2023 and 2022, and the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for the years then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of October 31, 2023 and 2022, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Going Concern Matter
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the financial statements, the Company has suffered recurring losses and negative cash flows from operations which raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 3. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/
www.malonebailey.com
We have served as the Company’s auditor since 2018.
February 13, 2024
F-2
Kaival Brands Innovations Group, Inc.
Consolidated Balance Sheets
| October 31, 2023 | October 31, 2022 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable | ||||||||
| Other receivable - related party - short term | ||||||||
| Inventories, net | ||||||||
| Prepaid expenses | ||||||||
| Income tax receivable | ||||||||
| Total current assets | ||||||||
| Fixed assets, net | ||||||||
| Intangible assets, net | ||||||||
| Other receivable - related party - net of current portion | ||||||||
| Right of use asset - operating lease | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accounts payable - related party | ||||||||
| Loans payable, net | ||||||||
| Accrued expenses | ||||||||
| Customer deposits | ||||||||
| Customer refund due | ||||||||
| Deferred revenue | ||||||||
| Operating lease obligation - short term | ||||||||
| Total current liabilities | ||||||||
| LONG TERM LIABILITIES: | ||||||||
| Operating lease obligation, net of current portion | ||||||||
| TOTAL LIABILITIES | ||||||||
| STOCKHOLDERS’ EQUITY: | ||||||||
| Preferred stock; shares authorized | ||||||||
| Series A Convertible Preferred stock ($ par value, shares authorized, issued and outstanding as of October 31, 2023 and October 31, 2022, respectively) | ||||||||
| Series B Convertible Preferred stock ($ par value, shares authorized, and issued and outstanding as of October 31, 2023 and October 31, 2022, respectively) | ||||||||
| Common stock | ||||||||
| ($ par value, shares authorized , and shares issued and outstanding as of October 31, 2023 and October 31, 2022, respectively) | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( |
) | ( |
) | ||||
| Total Stockholders’ Equity | ||||||||
| TOTAL LIABILITIES & EQUITY | $ | $ | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-3
Kaival Brands Innovations Group, Inc.
Consolidated Statements of Operations
| For the Years Ended October 31, | ||||||||
| 2023 | 2022 | |||||||
| Revenues | ||||||||
| Revenues, net | $ | $ | ||||||
| Revenues - related party | ||||||||
| Royalty revenue | ||||||||
| Excise tax on products | ( |
) | ( |
) | ||||
| Total revenues, net | ||||||||
| Cost of revenues | ||||||||
| Cost of revenue - related party | ||||||||
| Cost of revenue - other | ||||||||
| Total cost of revenue | ||||||||
| Gross profit | ||||||||
| Operating expenses | ||||||||
| Advertising and promotion | ||||||||
| General and administrative expenses | ||||||||
| Total operating expenses | ||||||||
| Other income (expense) | ||||||||
| Interest expense, net | ( |
) | ||||||
| Total other income (expense) | ( |
) | ||||||
| Loss before income taxes provision | ( |
) | ( |
) | ||||
| Provision for (benefit from) income taxes | ( |
) | ||||||
| Net loss | ( |
) | ( |
) | ||||
| Preferred stock dividend | ( |
) | ||||||
| Net loss attributable to common shareholders | $ | ( |
) | $ | ( |
) | ||
| Net loss per common share - basic and diluted | $ | ) | $ | ) | ||||
| Weighted average number of common shares outstanding - basic and diluted | ||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-4
| Kaival Brands Innovations Group, Inc. |
| Consolidated Statements of Changes in Stockholders’ Equity |
| For the years ended October 31, 2023, and 2022 |
| Convertible Preferred Shares | Par Value Convertible Preferred Shares | Convertible Preferred Shares | Par Value Convertible Preferred Shares | Common Shares | Par Value Common Shares | Additional Paid-in Capital | Accumulated Deficit | Total | ||||||||||||||||||||||||||||
| (Series A) | (Series A) | (Series B) | (Series B) | |||||||||||||||||||||||||||||||||
| Balances, October 31, 2021 | $ | $ | $ | $ | $ | ( |
) | $ | ||||||||||||||||||||||||||||
| Stock Issued for Services - RSUs | — | — | ||||||||||||||||||||||||||||||||||
| Common shares settled and cancelled | — | — | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||||||||||||||||
| Common stock issued for compensation | — | — | ||||||||||||||||||||||||||||||||||
| Exercise of common stock warrants | — | — | ||||||||||||||||||||||||||||||||||
| Converted Series A Convertible Preferred Stock | ( |
) | ( |
) | — | |||||||||||||||||||||||||||||||
| Stock option expense | — | — | — | |||||||||||||||||||||||||||||||||
| Net loss | — | — | — | ( |
) | ( |
) | |||||||||||||||||||||||||||||
| Balances, October 31, 2022 | $ | $ | $ | $ | $ | ( |
) | $ | ||||||||||||||||||||||||||||
| Common shares issued for purchase of intangible assets | — | — | ||||||||||||||||||||||||||||||||||
| Preferred series B shares issued for purchase of intangible assets | — | — | ||||||||||||||||||||||||||||||||||
| Stock warrants issued for purchase of intangible assets | — | — | — | |||||||||||||||||||||||||||||||||
| Common shares issued for services | — | — | ||||||||||||||||||||||||||||||||||
| Common shares issued for loan | — | — | ||||||||||||||||||||||||||||||||||
| Stock option expense | — | — | — | |||||||||||||||||||||||||||||||||
| Stock warrant expense | — | — | — | |||||||||||||||||||||||||||||||||
| Preferred stock dividend | — | — | — | ( |
) | ( |
) | |||||||||||||||||||||||||||||
| Net loss | — | — | — | ( |
) | ( |
) | |||||||||||||||||||||||||||||
| Balances, October 31, 2023 | $ | $ | $ | $ | $ | ( |
) | |||||||||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-5
Kaival Brands Innovations Group, Inc.
Consolidated Statements of Cash Flows
| For the Year Ended | For the Year Ended | |||||||
| October 31, 2023 | October 31, 2022 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net loss | $ | ( |
) | $ | ( |
) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Stock based compensation | ||||||||
| Stock options expense | ||||||||
| Stock warrants expense | ||||||||
| Depreciation and amortization | ||||||||
| Amortization of debt discount | ||||||||
| Bad debt expense | ||||||||
| ROU operating lease expense | ||||||||
| Inventory reserve | |
|
||||||
| Write-off of inventory | ||||||||
| Changes in current assets and liabilities: | ||||||||
| Accounts receivable | ( |
|||||||
| Other receivable - related party | ( |
) | ||||||
| Prepaid expenses | ( |
) | ||||||
| Inventory | ( |
) | ||||||
| Inventory deposit - related party | ||||||||
| Income tax receivable | ||||||||
| Accounts payable | ( |
) | ||||||
| Accounts payable - related party | ( |
) | ||||||
| Accrued expenses | ( |
) | ||||||
| Deferred revenue | ( |
) | ||||||
| Customer deposits | ( |
) | ||||||
| Customer refunds due | ( |
) | ||||||
| Right of use liabilities - operating lease | ( |
) | ( |
) | ||||
| Net cash used in operating activities | ( |
) | ( |
) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Cash paid for equipment | ( |
) | ||||||
| Transaction acquisition costs | ( |
) | ||||||
| Net cash used in investing activities | ( |
) | ||||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Proceeds from the exercise of warrants | |
|||||||
| Settled RSU shares with cash | ( |
) | ||||||
| Proceeds from loans payable | ||||||||
| Payments on loans payable | ( |
) | ||||||
| Net cash provided by financing activities | ||||||||
| Net change in cash | $ | ( |
) | $ | ( |
) | ||
| Beginning cash balance | ||||||||
| Ending cash balance | $ | $ | ||||||
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: | ||||||||
| Interest paid | $ | $ | ||||||
| Income taxes paid | $ | $ | ||||||
| NON-CASH TRANSACTIONS | ||||||||
| Common shares issued for acquisition of intangible assets | $ | $ | ||||||
| Common shares issued for services-transaction cost | $ | $ | ||||||
| Series B preferred stock shares issued for acquisition of intangible assets | $ | $ | ||||||
| Stock warrants issued for acquisition of intangible assets | $ | $ | ||||||
| Preferred stock dividend | $ | $ | ||||||
| Insurance financed by third party | $ | $ | ||||||
| Common stock issued for note payable financing | $ | $ | ||||||
| Conversion of Series A Preferred Stock Shares to Common Stock Shares | $ | $ | ||||||
| New ROU leased asset recognized | $ | $ | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-6
KAIVAL BRANDS INNOVATIONS GROUP, INC.
NOTES TO THE 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.
Current Description of Business
The Company is focused on growing and incubating innovative and profitable products into mature, dominant brands. On March 9, 2020, the Company entered into an exclusive distribution agreement (the “Distribution Agreement”) of certain electronic nicotine delivery systems (“ENDS”) and related components (the “Products”) with Bidi Vapor, LLC, a Florida limited liability company (“Bidi”), a related party company that is also owned by Nirajkumar Patel, the Chief Science and Regulatory Officer and director of the Company. The Distribution Agreement was amended and restated on May 21, 2020, again on April 20, 2021, again on June 10, 2022, and again on November 17, 2022 (collectively the “A&R Distribution Agreement”), in order to clarify some of the provisions and memorialize the Company’s current business relationship with Bidi. Pursuant to the A&R Distribution Agreement, Bidi granted the Company an exclusive worldwide right to distribute the Products for sale and resale to non-retail level customers. Currently, the Products consist primarily of the “Bidi Stick.” The Company ceased all direct-to-consumer sales in February 2021.
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, for the purpose of developing Company-branded and white-label products and services. The Company has not yet launched any Kaival-branded product, nor has it begun to provide white label wholesale solutions for other product manufacturers. On March 11, 2022, the Company formed Kaival Brands International, LLC, a Delaware limited liability company (herein referred to as “KBI”), as a wholly owned subsidiary of the Company, for the purpose of entering into an international licensing agreement with Philip Morris Products S.A. (“PMPSA”), a wholly owned affiliate of Philip Morris International Inc. (“PMI”).
F-7
On June 13, 2022, the Company’s 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.
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.
COVID-19
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 was indirectly impacted by supply chain issues and regulatory oversight. The Company believes 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 additional revenue.
Impact of FDA PMTA Determinations and August 2022 11th Circuit 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 Marketing Denial Orders (“MDO”), manufacturers are required to stop selling non-tobacco flavored ENDS products.
Bidi, along with nearly every other company in the ENDS industry, received a MDO for its non-tobacco flavored ENDS products. With respect to Bidi, the MDO covered all non-tobacco flavored BIDI® Sticks, including its Arctic (menthol) BIDI® Stick. As a result, beginning in September 2021, Bidi challenged 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 the 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, and not strictly a menthol flavored product.
F-8
On September 29, 2021, Bidi petitioned the U.S. Court of Appeals for the Eleventh Circuit (the “11th Circuit”) to review the FDA’s denial of the PMTAs for its non-tobacco flavored BIDI® Stick ENDS, arguing that it was arbitrary and capricious under the Administrative Procedure Act (“APA”), as well as ultra vires, for the FDA not to conduct any scientific review of Bidi’s comprehensive applications, as required by the Tobacco Control Act (“TCA”), to determine whether the BIDI® Sticks are “appropriate for the protection of the public health”. Bidi further argued that the FDA violated due process and the APA by failing to provide fair notice of the FDA’s new requirement for ENDS companies to conduct long-term comparative smoking cessation studies for their flavored products, and that the FDA should have gone through the notice and comment rulemaking process for this requirement.
On October 14, 2021, Bidi requested that the FDA re-review the MDO and reconsider its position that Bidi did not include certain scientific data in its applications sufficient to allow the PMTAs to proceed to scientific review. 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 decided not to rescind the MDO and lifted its administrative stay on December 17, 2021. Following the lifting of the FDA’s administrative stay, Bidi filed a renewed motion to stay the MDO with the 11th Circuit. On February 1, 2022, the appellate court granted Bidi’s motion to stay (i.e., put on hold) the MDO, pending the litigation on the merits. Oral arguments in the merits-based proceeding were held on May 17, 2022.
On August 23, 2022, the U.S. Court of Appeals for the Eleventh Circuit set aside the MDO issued to the non-tobacco flavored BIDI® Sticks and remanded Bidi’s Premarket Tobacco Product Application (“PMTA”) back to the FDA for further review. Specifically, the Court held that the MDO was “arbitrary and capricious” in violation of the Administrative Procedure Act (“APA”) because the FDA failed to consider the relevant evidence before it, specifically Bidi’s aggressive and comprehensive marketing and sales-access-restrictions plans designed to prevent youth appeal and access.
The opinion further indicated that the FDA did not properly review the data and evidence that it has long made clear are critical to the appropriate for the protection of the public health (“APPH”) standard for PMTAs set forth in the Tobacco Control Act including, in Bidi’s case, “product information, scientific safety testing, literature reviews, consumer insight surveys, and details about the company’s youth access prevention measures, distribution channels, and adult-focused marketing practices,” which “target only existing adult vapor product users, including current adult smokers,” as well as the Company’s retailer monitoring program and state-of-the-art anti-counterfeit authentication system. Because a MDO must be based on a consideration of the relevant factors, such as the marketing and sales-access-restrictions plans, the denial order was deemed arbitrary and capricious, and vacated by the FDA.
The FDA did not appeal the 11th Circuit’s decision. The Agency had until October 7, 2022 (45 days from the August 23, 2022 decision) to either request a panel rehearing or a rehearing “en banc” (a review by the entire 11th Circuit, not just the 3-judge panel that issued the decision), and until November 21, 2022 (90 days after the decision) to seek review of the decision by the U.S. Supreme Court. No request for a rehearing was filed, and no petition for a writ of certiorari was made to the Supreme Court.
In the meantime, the Company anticipates continued ability to market and sell the non-tobacco flavored BIDI® Sticks, subject to the FDA’s enforcement discretion, for the duration of the PMTA scientific review.
Separately, on or about May 13, 2022, the FDA placed the tobacco-flavored Classic BIDI® Stick into the final Phase III scientific review. In March 2023, FDA issued a deficiency letter regarding the Classic BIDI® Stick PMTA, to which Bidi submitted in June 2023. Subsequently, on January 22, 2024, FDA issued a MDO for the Classic BIDI® Stick. On January 26, 2024, Bidi filed a petition for review of the MDO with the 11th Circuit Court of Appeals, followed by a motion to stay the MDO. Bidi is arguing, among other things, that the MDO was arbitrary and capricious in violation of the Administrative Procedure Act. The Company cannot provide any assurances as to the timing or outcome.
F-9
Risks and Uncertainties
The FDA has indicated that it is prioritizing enforcement of unauthorized ENDS against companies (1) that never submitted PMTAs, (2) whose PMTAs have been refused acceptance or filing by the FDA, (3) whose PMTAs remain subject to MDOs, and (4) that are continuing to market unauthorized synthetic nicotine products after the July 13, 2022, cutoff. Subject to FDA’s enforcement discretion, until the scientific review process is complete on each of Bidi’s PMTA’s, the Company views the risk of FDA enforcement against Bidi as low. The Company anticipates FDA will move forward with a review of Bidi’s PMTA on remand, as directed by the Court; however, the Company cannot provide any assurances as to the timing or outcome.
Note 2 – Basis of Presentation and Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the financial statements of the Company’s wholly-owned subsidiaries, Kaival Labs and Kaival Brands International. Intercompany transactions are eliminated.
Basis of Presentation
This summary of significant accounting policies is presented to assist in understanding the Company’s consolidated financial statements. These accounting policies conform to accounting principles, generally accepted in the United States of America (“GAAP”) and have been consistently applied in the preparation of the consolidated financial statements.
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
The Company considers all highly liquid investments
with an original maturity of three months or less when purchased to be cash equivalents. There were
The Federal Deposit Insurance Corporation
(“FDIC”) insures deposits according to the ownership category in which the funds are insured and how the accounts are
titled. The standard deposit insurance coverage limit is $
Advertising and Promotion
All advertising, promotion and marketing expenses, including commissions, are expensed when incurred.
F-10
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 the management’s assessment of the collectability
of accounts receivable. A considerable amount of judgment is required in assessing the amount of the allowance and the Company considers
the historical level of credit losses and collection history and applies percentages to aged receivable categories. The Company makes
judgments about the creditworthiness of debtors based on ongoing credit evaluations and monitors current economic trends that might impact
the level of credit losses in the future. If the financial condition of the debtors were to deteriorate, resulting in their inability
to make payments, a larger allowance may be required. As of October 31, 2023, 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 is required.
The Company also had
On January 22, 2024, the FDA issued an MDO on Bidi
Vapor’s “Classic” BIDI ® Stick PMTA. The Company evaluated the impact of this MDO to the financial statements
and recorded an estimated accrual for potential customer returns of the “Classic” products of $
Inventories
All product inventory is purchased from a related
party, Bidi. Inventories are stated at the lower of cost and net realizable value. Cost includes all costs of purchase and other costs
incurred in bringing the inventories to their present location and condition. The Company determines cost based on the first-in, first-out
(“FIFO”) method. Net realizable value is the estimated selling price in the ordinary course of business less the estimated
costs of completion and the estimated costs necessary to make the sale. As of October 31, 2023, the inventories only consisted of finished
goods and were located in three locations; the Kaival main warehouse and two customer warehouses whose service agreements are on
a consignment basis with Kaival. During fiscal year 2023, the Company had a write-off of $
On January 22, 2024, the FDA issued an MDO on Bidi Vapor’s “Classic” BIDI ® Stick PMTA. The Company evaluated the impact of this MDO to the financial statements and recognized a full reserve for all remaining “Classic” products on hand amounting to $381,512 as of October 31, 2023 in order to comply with ASC 855 Subsequent Events. See Note 12.
Revenue Recognition
The Company adopted ASC 606, Revenue from Contracts with Customers (Topic 606) (“ASC 606”), in the second quarter of fiscal year 2020, as this was the first quarter that the Company generated revenues. Under ASC 606, the Company recognizes revenue when a customer obtains control of promised goods, in an amount that reflects the consideration that the Company expects to receive in exchange for the goods. To determine revenue recognition for arrangements within the scope of ASC 606, the Company performs the following five steps: (1) identify the contracts with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when or as the entity satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods it transfers to the customer. Under ASC 606, disaggregated revenue from contracts with customers depicts the nature, amount, timing, and uncertainty of revenue and cash flows affected by economic factors.
Deferred Revenue
The Company accepts partial payments for orders from
wholesale customers, which it holds as deposits or deferred revenue, until the Company has received full payment and orders are shipped
to the customer. Revenue for these orders is recognized at the time of shipment to the customer. As of October 31, 2023, and October
31, 2022, the Company has $
Customer Refunds
In the normal course of business, the Company issues
credits for product returns and certain customer incentives related to rebates, discounts and promotions. When such credits exceed amounts
receivable from customers, the Company recognizes such excess amounts as customer refunds which will be applied against future product
purchases. As of October 31, 2023, and October 31, 2022, the Company had $
F-11
Products Revenue
The Company generates products revenue from the sale of the Products (as defined above) to non-retail customers. The Company recognizes revenue at a point in time based on management’s evaluation of when performance obligations under the terms of a contract with the customer are satisfied and control of the Products has been transferred to the customer. In most situations, transfer of control is considered complete when the products have been shipped to the customer. The Company determined that a customer obtains control of the Product upon shipment when title of such product and risk of loss transfer to the customer. The Company’s shipping and handling costs are fulfillment costs, and such amounts are classified as part of cost of sales. The Company offers credit sales arrangements to non-retail (or wholesale) customers and monitors the collectability of each credit sale routinely.
Revenue is measured by the transaction price, which is defined as the amount of consideration expected to be received in exchange for providing goods to customers. The transaction price is adjusted for estimates of known or expected variable consideration, which includes refunds and returns as well as incentive offers and promotional discounts on current orders. Estimates for sales returns are based on, among other things, an assessment of historical trends, information from customers, and anticipated returns related to current sales activity. These estimates are established in the period of sale and reduce revenue in the period of the sale. Variable consideration related to incentive offers and promotional programs are recorded as a reduction to revenue based on amounts the Company expects to collect. Estimates are regularly updated, and the impact of any adjustments are recognized in the period the adjustments are identified. In many cases, key sales terms such as pricing and quantities ordered are established at the time an order is placed and incentives have very short-term durations.
Amounts billed and due from customers are short term in nature and are classified as receivable since payments are unconditional and only the passage of time related to credit terms is required before payments are due. The Company does not grant payment financing terms greater than one year. Payments received in advance of revenue recognition are recorded as deferred revenue, as noted above.
Royalty Revenue
On June 13, 2022, KBI entered into 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 a percentage of the base price of the first sale of each unit of Product manufactured.
In addition, before the launch of the first product in a market and each anniversary of such launch, PMPSA agrees to pre-pay to KBI a
guaranteed minimum royalty based on the estimated royalties payable by PMPSA to KBI in relation to all markets in the twelve (12)-month
period following the first launch or each successive anniversary of the first launch, subject to an aggregate maximum guaranteed royalty
payment for all markets for each applicable twelve (12)-month period. PMPSA may require modification of certain products to be sold under
the PMI Licensing Agreement to be modified for a PMI Market. Pursuant to the PMI Licensing Agreement, PMPSA has absolute discretion over
sales, marketing, product branding and packaging pertaining to sales in the PMI Markets, as well as the right to select the specific
PMI Markets in which to launch commercialization and determine what product types are to be promoted in each market, subject to sales
and marketing plans and annual business plans set by PMPSA and certain expansion criteria agreed between PMPSA and KBI. Royalty revenue
earned from the PMI License Agreement is recognized in the period the sales of the Product manufactured occurs. As of October 31, 2023,
amounts receivable from PMPSA in connection with the PMI License Agreement totaled $
F-12
The PMI License Agreement contains customary representations,
warranties, covenants, and indemnification provisions; however, KBI’s liability under the PMI License Agreement is capped at the
greater of: (i) Ten Million Dollars ($
On June 10, 2022, Bidi entered into a License Agreement (the “KBI License Agreement”) with KBI, pursuant to which KBI has the exclusive irrevocable license to use Bidi’s licensed intellectual property to the extent necessary for KBI to fulfill its obligations set forth in the PMI Licensing Agreement. Such irrevocable license includes: (i) the right of KBI to grant sub-licenses to PMPSA under the PMI License Agreement for the express purposes set forth in the PMI License Agreement, but for no other purpose; (ii) the right of KBI to grant to PMPSA the right to grant sub-sub-licenses in the manner set forth in the PMI License Agreement, but for no other purpose; and (iii) certain branding rights to the extent (but only to the extent) necessary to permit KBI to perform its obligations to PMPSA as set forth in the PMI License Agreement.
On August 12, 2023, the Company executed and entered into a Deed of Amendment No. 1 (the “PMI License Amendment”) with PMPSA, Bidi and KBI. Pursuant to the PMI License Amendment (which has an effective date of June 30, 2023), the following material changes have been made to the PMI License Agreement:
1. Royalty Rate.
2. Elimination of Certain Potential Royalty Adjustments. Certain potential adjustments to the royalties receivable by KBI as provided for in the PMI License Agreement have been eliminated.
3. Guaranteed Royalty. The guaranteed royalty payment owed to KBI under the PMI License Agreement has been eliminated. Instead, royalties will be paid on a quarterly basis going-forward based on actual sales. Any unpaid guaranteed royalty has been cancelled.
4. Insurance Tail Requirements. KBI’s requirement to keep certain tail insurance after the expiration or termination of the PMI Licensing Agreement was reduced from 6 years to 2 years.
5. Markets. The identification of the PMI Markets that PMI may enter has been expanded to cover certain additional territories.
6. Net Reconciliation Payment
to KBI. As a result of the changes to the PMI License Agreement described in paragraphs 1 thought 3 above, the value of such changes
was calculated and reconciled as of the date of commencement of the PMI Licensing Agreement through June 30, 2023. On September 8, 2023,
the Company received the Net Reconciliation Payment from PMPSA of $
The KBI License Agreement provides that KBI shall pay Bidi license fees equivalent to 50% of the adjusted earned royalty payments, after any offsets due to jointly agreed costs such development costs incurred for entry to specific international markets. During the year ended October 31, 2023, the Company paid license fees of approximately $150,000 to Bidi. As of October 31, 2023 and 2022, no additional license fees are owed to Bidi.
F-13
Concentration of Revenues and Accounts Receivable
For the fiscal year 2023, (i) approximately 15% or
$
For the fiscal year 2022, (i) approximately 30% or
$
FAVS Business LLC with an outstanding balance of
$
Favs Business with an outstanding balance of $
The Company measures the cost of services received in exchange for an award of equity instruments (share-based payments, referred to herein as “SBP”) based on the grant-date fair value of the award. That cost is recognized over the period during which a recipient is required to provide service in exchange for the SBP award—the requisite service period (vesting period). For SBP awards subject to performance conditions, compensation is not recognized until the performance condition is probable of occurrence. The grant-date fair value of share options is estimated using the Black-Scholes-Merton option-pricing model based on certain assumptions which include the expected term, expected volatility and discount rate.
The expected term of options granted represents the period of time that options granted are expected to be outstanding. The expected volatility is based on the volatility in the trading of the Common Stock over the expected term of the award. The assumed discount rate is the default risk-free ten-year interest rate for U.S. Treasury bills.
Basic net income (loss) per share is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding during the period, without consideration of potential common stock equivalents.
F-14
Diluted net income (loss) per share is calculated by dividing net income (loss) available to common stockholders by the weighted average number of common stock outstanding plus common share equivalents from conversion of dilutive stock options and warrants using the treasury method and preferred stock using the as-converted method, except when antidilutive. In the event of a net loss, the effects of all potentially dilutive shares are excluded from the diluted net loss per share calculation as their inclusion would be antidilutive. For the year ended October 31, 2023 the outstanding common stock equivalents excluded from the computation of diluted net loss were shares for stock options, shares for warrants and shares for series B convertible preferred stock. For the year ended, October 31, 2022 the outstanding common stock equivalents excluded from the computation of diluted net loss were shares for stock options and shares for warrants .
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, consisting of total deferred tax assets, totaling approximately $
Fair Value of Financial Instruments
The Company’s balance sheet includes certain financial instruments. The carrying amounts of current assets and current liabilities approximate their fair value because of the relatively short period of time between the origination of these instruments and their expected realization.
ASC 820, Fair Value Measurements and Disclosures (“ASC 820”), defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy that distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are described below:
| ● | Level 1 – Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. | |
| ● | Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, including quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates); and inputs that are derived principally from or corroborated by observable market data by correlation or other means. | |
| ● | Level 3 – Inputs that are both significant to the fair value measurement and unobservable. |
F-15
Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of October 31, 2023 and 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, accounts payable and accrued expenses. As of October 31, 2023, and 2022, the Company did not have any financial assets or liabilities measured and recorded at fair value on a recurring basis.
Recent Accounting Pronouncements
In August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470- 20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”). ASU 2020-06 simplified the accounting for certain financial instruments with characteristics of liabilities and equity. This ASU (1) simplified the accounting for convertible debt instruments and convertible preferred stock by removing the existing guidance in ASC 470-20, Debt: Debt with Conversion and Other Options, that required entities to account for beneficial conversion features and cash conversion features in equity, separately from the host convertible debt or preferred stock; (2) revised the scope exception from derivative accounting in ASC 815-40 for freestanding financial instruments and embedded features that are both indexed to the issuer’s own stock and classified in stockholders’ equity, by removing certain criteria required for equity classification; and (3) revised the guidance in ASC 260, Earnings Per Share, to require entities to calculate diluted earnings per share (“EPS”) for convertible instruments by using the if-converted method. In addition, entities must presume share settlement for purposes of calculating diluted EPS when an instrument may be settled in cash or shares. ASU 2020-06 was effective for the Company for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption was permitted. The Company has elected to early adopt ASU 2020-06 effective beginning November 1, 2022. There was no impact on the consolidated financial statements as a result of adopting this standard.
The Company does not believe that any recently issued effective pronouncements, or pronouncements issued but not yet effective, if adopted, would have a material effect on the accompanying financial statements. However, In March 2022, the FASB issued ASU 2022-02, “Financial Instruments-Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures.” ASU 2022-02 addresses areas identified by the FASB as part of its post-implementation review of the credit losses standard (ASU 2016-13) that introduced the current expected credit loss (“CECL”) model. The amendments eliminate the accounting guidance for troubled debt restructurings (“TDRs”) by creditors that have adopted the CECL model and enhance the disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. In addition, the amendments require a public business entity to disclose current-period gross write-offs for financing receivables and net investment in leases by year of origination in the vintage disclosures. The amendments in this ASU should be applied prospectively, except for the transition method related to the recognition and measurement of TDRs, where an entity has the option to apply a modified retrospective transition method resulting in a cumulative-effect adjustment to retained earnings in the period of adoption. This is not effective for the Company until November 1, 2023
Note 3 – Going Concern
The accompanying financial statements of the Company are prepared in accordance with U.S. GAAP applicable to a going concern, which contemplates realization of assets and the satisfaction of liabilities in the normal course of business within one year after the date the consolidated financial statements are issued.
In accordance with Financial Accounting Standards Board (“FASB”), Accounting Standards Update (“ASU”) No. 2014-15, Presentation of Financial Statements – Going Concern (Subtopic 205-40), the Company’s management evaluates whether there are conditions or events, considered in aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the accompanying financial statements are issued.
The Company will need significant additional funds to satisfy its outstanding payables, fund its working capital, and fully implement its business plan as the Company seeks to grow its revenues and ultimately achieve positive cash flow and profitability. In addition, the Company’s ability to continue as a going concern is adversely affected by the uncertainty surrounding Bidi’s PMTA process with FDA and outcome of Bidi’s petition with the 11th Circuit Court of Appeals regarding the FDA’s January 2024 MDO relating to Classic Bidi® Stick as well as the Company’s negative cash flows from operations, significant recurring losses and present need for additional funding. All of these factors raise substantial doubt regarding the Company’s ability to continue as a going concern.
Management plans to continue similar operations with increased marketing and enhanced efforts to increase sales, which the Company believes will result in increased revenue and ultimately net income and positive cash flow from operations.
However, there is no assurance that the Company’s plans will be able to generate expected or greater amounts of revenues or ever achieve profitability due to the factors listed above as well as the regulation and public perception of ENDS products and the various other risks faced by the Company. The accompanying consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of these or other risks or uncertainties.
Note 4 –Acquisition of GoFire Assets
On May 30, 2023 (the “Closing Date”), the Company and Kaival Labs entered into an Asset Purchase Agreement (the “GoFire APA”) with GoFire, Inc. (“GoFire”) to purchase certain intellectual property assets of GoFire consisting of various patents concerning electronic vaporizers and related technologies (the “Purchased Assets”) in exchange for equity securities of the Company and certain contingent cash consideration. The Company participated in this transaction with the intent to diversify its product offerings and create both near and long-term revenue opportunities. The Purchased Assets consist of 19 existing and 47 pending patents with novel technologies related to vaporization and inhalation.
Pursuant to the terms of the GoFire APA, the Company paid to GoFire, in addition to certain contingent cash consideration described below, consideration in the form of equity securities of the Company consisting of (i) an aggregate of shares of Common Stock (the “APA Shares”); (ii) shares of newly-designated Series B Convertible Preferred Stock, par value $ per share, (the “Series B Preferred Stock” and the shares of Common Stock underlying the Series B Preferred, the “Series B Conversion Shares”), the rights, preferences and terms of which are set forth in a Certificate of Designation of Rights and Preferences of the Series B Preferred Stock (the “Certificate of Designation”), and (iii) a common stock purchase warrant to purchase shares of Common Stock (the “Warrant” and the shares of Common Stock underlying the Warrant, the “Warrant Shares”). As additional consideration for the Purchased Assets, any cannabis-specific (meaning cannabis, hemp or cannabinoid) royalties that are generated by Kaival Labs from or due to the Purchased Assets, from the Closing Date until January 1, 2027, will be subject to a contingent cash payment (“CCP”). Prior to the earlier of: (i) the Company achieving less than or equal to $15,000,000 in aggregate gross cannabis-specific royalties from any Kaival Labs licensing agreements, and (ii)
F-16
January 1, 2027, the Company shall pay GoFire a CCP equal to 50% of the aggregate gross cannabis-specific royalties generated by the
Purchased Assets. After the earlier of: (i) the Company achieving greater than $15,000,000 in aggregate gross cannabis-specific royalties,
and (ii) January 1, 2027, the Company shall pay GoFire a CCP equal to 10% of the aggregate gross cannabis-specific royalties generated
by the Purchased Assets until January 1, 2027. Pursuant to the GoFire APA, the Company is required to use commercially reasonable efforts
to register the APA Shares and Warrant Shares with the SEC for distribution to GoFire’s stockholders and/or public resale by such
stockholders within 180 days of the Closing Date. In addition, if any Series B Preferred Stock remains outstanding nineteen (19) months
after the Closing Date, the Company shall use commercially reasonable efforts to file with the SEC a subsequent registration statement
registering the distribution to GoFire’s stockholders and/or public resale Series B Conversion Shares by such stockholders. If
such subsequent registration statement is required, the Company will use its commercially reasonable efforts to obtain effectiveness
of such subsequent registration statement within nineteen (19) months of the Closing Date, and if the Company does not so register the
Series B Conversion Shares within nineteen (19) months of the Closing Date, the Company will issue to GoFire or its designee an additional
ten percent (10%) of all of the Series B Conversion Shares underlying the then outstanding shares of Series B Preferred Stock. All of
the securities issued as consideration for the Purchased Assets are subject to a lock-up agreement that terminates one hundred eighty
(180) days from the Closing Date.
The Company has determined that the acquisition of the Purchased Assets constitutes an asset acquisition and has recorded the assets under a cost accumulation model. Assets acquired and liabilities assumed are recognized at cost, which is the consideration the acquirer transferred to the seller, as well as direct transaction costs, on the acquisition date. The cost of the acquisition is then allocated to the assets acquired based on their relative fair values. The cost of acquisition does not include any contingent consideration related to contingent cash payments as those obligations are contingent in future amount of royalties and will be recognized when the contingency is resolved, and the consideration is paid or becomes payable. Goodwill is not recognized in asset acquisition. The Purchased Assets have been recorded at a cost of $11,795,975 and are included in Intangible Assets in the consolidated balance sheet.
The consideration paid for the GoFire APA was as follows (see Note 5):
| Schedule of consideration paid | ||||
| Common Stock | $ | |||
| Series B Preferred Stock | ||||
| Common Stock Warrants | ||||
| Transaction Costs | ||||
| Total consideration | $ |
The fair value of the Common Stock is based on the publicly traded share price as of the acquisition date and represents a Level 1 measurement.
The fair value of the Series B Preferred Stock and Common Stock Warrants were determined using the Black-Scholes Option Pricing model. The fair value measurements are based on significant unobservable inputs, including management estimates and assumptions, and thus represent Level 3 measurements.
Note 5 – Intangible Assets, net
The Company’s intangible assets include
patents and technology that were acquired pursuant to the GoFire APA. The cost and accumulated amortization of the intangible assets
amounted to $
The Company recognized an amortization expense of $327,666 for the year ended October 31, 2023. Amortization expense is included under general and administrative expenses in the consolidated statement of operations.
F-17
Future amortization expense of intangible assets is as follows:
| Schedule of future amortization expense of intangible assets | |||||
| 2024 | $ | ||||
| 2025 | |||||
| 2026 | |||||
| 2027 | |||||
| 2028 | |||||
| Thereafter | |||||
| Total | $ |
Note 6 – Loans Payable
On May 9, 2023, the Company entered into two loan agreements which are collateralized by all assets of the Company until the loans are repaid in full. As illustrated in the following table, under the terms of these agreements, the Company received the disclosed Purchase Price and agreed to repay the disclosed Purchase Amount, which is collected by the lenders at the disclosed weekly payment rate. The Company’s former Chief Executive Officer, Eric Mosser personally guarantees the performance of these loans.
The Company has accounted for these agreements as loans under ASC 860 because while we provided rights to current and future receipts, we still had control over the receipts. The difference between the Purchase Amount and the Purchase Price is imputed interest that is recorded as interest expense when paid.
The following table shows our loan agreements as of October 31, 2023, and there were none as of October 31, 2022:
| Schedule of loan agreements | ||||||||||||||||||||||||
| Purchase | Payment | Payment | Deferred | |||||||||||||||||||||
| Inception Date | Price | Purchased Amount | Outstanding Balance | frequency | Rate | Finance | ||||||||||||||||||
| Fees | ||||||||||||||||||||||||
| May 9, 2023 | $ | $ | $ | Weekly | $ | |||||||||||||||||||
| May 9, 2023 | Weekly | |||||||||||||||||||||||
| $ | $ | $ | $ | |||||||||||||||||||||
On August 9, 2023, the Company entered into a Securities Purchase Agreement (the “SPA”) with AJB Capital Investments, LLC (“AJB”), pursuant to which the Company sold a Promissory Note in the principal amount of $650,000 (the “Note”) to AJB in a private transaction for a purchase price of $585,000 (giving effect to original issue discount of $65,000). The Note matures on February 8, 2024 (the “Maturity Date”) and bears interest at the rate of 10% per annum. Interest shall be payable on a monthly basis beginning on the date that is one month following the date of issuance of the Note. Provided no event of default (as defined in the Note) is in effect as of the Maturity Date, the Company may elect to extend the Maturity Date for a period of six (6) months. Pursuant to the terms of the SPA, the Company paid a commitment fee to AJB in the form of shares of Common Stock (the “Commitment Fee Shares”) with a relative fair value of $130,478 which was recognized as discount to the note. The debt discount and issuance costs are amortized over the term of the note. Amortization expense amounted to $122,273 for the year ended October 31, 2023. Under the SPA, the Company has the right to repurchase half of the Commitment Fee Shares if the Note is repaid in full prior to maturity. As of October 31, 2023 the carrying value of the loan and unamortized debt discount and issuance costs were $513,295 and $136,705 respectively
On May 20, 2023, the Company obtained a nine
month loan from Westfield Bank to finance the annual D&O insurance. The principal amount was $
F-18
Note 7 – Leases
The Company capitalizes all leased assets pursuant to ASU 2016-02, Leases (Topic 842) (“Topic 842”), which requires lessees to recognize right-of-use (“ROU”) assets and lease liability, initially measured at present value of the lease payments, on its balance sheet for leases with terms longer than 12 months and classified as either financing or operating leases. The Company excludes short-term leases having initial terms of 12 months or less from Topic 842 as an accounting policy election and recognizes rent expense on a straight-line basis over the lease term. The Company does not have financing leases and only one operating lease for office space and inventory storage space with a related party, as of October 31, 2023. Certain of the Company’s leases, have and may in the future, include renewal options, which have been and might be in the future, included in the calculation of the lease liabilities and right of use assets when the Company is reasonably certain to exercise the option.
Office and Storage Space On November 1, 2021
On November 11, 2021
On June 10, 2022, the Company entered into a Lease
Agreement (the “2022 Lease”) with Just Pick for approximately 21,332 rentable square feet combined in the office building
and warehouse located at 4460 Old Dixie Highway, Grant-Valkaria, Florida 32949 (the “Premises”), together with all improvements
thereon. The Company must pay Just Pick base rent equal to $
Cash flow information related to leases was as follows:
| Schedule of cash flow information related to leases | ||||||||
| October 31, 2023 | October 31, 2022 | |||||||
| Other Lease Information | ||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||||||
| Operating cash flows from operating leases | $ | ( |
) | $ | ( |
) | ||
The following table summarizes the lease-related assets and liabilities recorded in the consolidated balance sheets on October 31, 2023, and 2022:
| Schedule of condensed balance sheet | ||||||||
| Lease Position | October 31, 2023 | October 31, 2022 | ||||||
| Operating Leases | ||||||||
| Operating lease right-of-use assets | $ | $ | ||||||
| Right of use liability operating lease, current portion | $ | $ | ||||||
| Right of use liability operating lease, long term | ||||||||
| Total operating lease liabilities | $ | $ | ||||||
F-19
The following table provides the future minimum operating lease payments as of October 31, 2023:
| Schedule of lessee operating lease liability maturity | |||||
| Operating | |||||
| Leases | |||||
| Future minimum operating lease liabilities on October 31, 2023 | |||||
| 2024 | $ | ||||
| 2025 | |||||
| 2026 | |||||
| 2027 | |||||
| 2028 and thereafter | |||||
| Total future undiscounted lease payments | $ | ||||
| Less: Imputed interest | ( | ) | |||
| Present value of lease liabilities | $ | ||||
As of October 31, 2023, the Company had no additional leases which had not yet commenced.
Note 8 – Stockholders’ Equity
Common Shares
During the year ended October 31, 2023, the Company issued shares of Common Stock as consideration for the acquisition of the GoFire Purchased Assets. The Company also issued shares of Common Stock as compensation for advisory services rendered in connection with the GoFire APA. See Note 4.
During the year ended October 31, 2023, the Company
issued common shares with a value of $
During the year ended October 31, 2022, the Company issued
common shares for services rendered with a fair value of $.
There were
common shares issued for the conversion of Series A Convertible Preferred Stock to Common Stock, see preferred shares converted
below. The Company issued
for $
The Company’s stock-based compensation for Common Stock issued for services for the fiscal years ended October 31, 2023, and October 31, 2022, was $ and $, respectively.
Restricted Stock Unit Awards
During the year ended October 31, 2022, shares
of Common Stock were issued to seven employees of the Company pursuant to restricted stock unit (“RSU”) agreements, resulting
in $ of share-based compensation. Of the shares issued to employees, shares were withheld by the Company
to satisfy tax withholding obligations equal to $
On March 4, 2022, the Company’s Board approved
the termination of the RSU agreements with the consent of the employees. At the time these agreements were terminated, there remained
unvested RSUs with approximately $
Series A Convertible Preferred Stock
Each share of the Series A Preferred Stock was initially
convertible into 100 shares of Common Stock; However, it was affected by a subsequent reverse stock split also,
F-20
Series B Convertible Preferred Stock
The Company issued shares of the Series B
Preferred Stock as consideration for the acquisition of the GoFire Purchased Assets. The Series B Preferred Stock carries no voting rights
except: (i) with respect to the ability of the holders of a majority of the then outstanding Series B Preferred Stock (the “Majority
Holders”), to nominate a director to the Company’s board of directors, and (ii) that the vote of the Majority Holders is
necessary for effecting any amendment to the Company’s Certificate of Incorporation or Certificate of Designation that affects
the Series B Preferred Stock. The Series B Preferred Stock is redeemable at the option of the Company at a redemption price of $ per
share, subject to potential downward adjustments based on the trading price of the Common Stock. Subject to additional limitations in
the GoFire APA, the Series B Preferred Stock holds seniority over the Common Stock and each other class of series of securities now existing
or hereafter authorized with respect to dividend rights, the distribution of assets upon liquidation, and dissolution and redemption
rights. Upon a liquidation and winding up of the Company, the holders of Series B Preferred Stock are entitled to a liquidation preference
of $
Stock Options
Summary of stock options information is as follows:
| Schedule of stock options | ||||||||||||||||
| Aggregate | Aggregate | Exercise | Average | |||||||||||||
| Number | Exercise Price | Price Range | Exercise Price | |||||||||||||
| Outstanding, October 31, 2021 | $ | $ | - | $ | ||||||||||||
| Granted | - | |||||||||||||||
| Exercised | ||||||||||||||||
| Cancelled, forfeited, or expired | ( |
) | ( |
) | - | |||||||||||
| Outstanding, October 31, 2022 | - | |||||||||||||||
| Granted | - | |||||||||||||||
| Exercised | ||||||||||||||||
| Cancelled, forfeited, or expired | ( |
) | ( |
) | ||||||||||||
| Outstanding, October 31, 2023 | $ | $ | - | |||||||||||||
| Exercisable, October 31, 2023 | $ | $ | - | $ | ||||||||||||
F-21
The fair value of each option granted during the year ended October 31, 2023 and 2022 was estimated on the date of grant using the Black-Scholes option-pricing model with the weighted average assumptions in the following table:
| Schedule of assumptions | ||||||||
| 2023 | 2022 | |||||||
| 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 US Treasury bills.
During the year ended October 31, 2022, the Company recognized stock option expense
of $
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 fair value of the options on the grant dates was $
On April 22, 2022, non-qualified stock options exercisable
for up to shares of Common Stock were awarded to one consultant of the Company. These stock options have a ten-year term from the
grant date, with one-half of the shares vesting on June 30, 2022 and the remaining one-half of the shares vesting on October 31, 2022. The
fair value of the options on the grant date was
On May 18, 2022, non-qualified stock options exercisable
for up to shares of Common Stock were awarded to one consultant of the Company. These stock options have a ten-year term from
the grant date, with the shares fully vesting on December 1, 2022. The fair value of the options on the grant date was $
On August 1, 2022, non-qualified stock options exercisable
for up to shares of Common Stock were awarded to one employee of the Company. These stock options have a ten-year term from the
grant date, with the shares fully vesting on August 1, 2023. The fair value of the options on the grant date was $
On August 24, 2022, non-qualified stock options exercisable
for up to shares of Common Stock were awarded to one consultant of the Company. These stock options have a ten-year term from the
grant date, with the shares fully vesting on grant date. The fair value of the options on the grant date was $
On March 4, 2022, options exercisable for up to an
aggregate of shares of Common Stock were granted from this new stock option program to the executive officers and employees, as
a result of the transition. The fair values of the options on the grant dates, as noted above, were approximately $
On June 24, 2022, non-qualified stock options exercisable
for up to shares of Common Stock were awarded to two officers and three board members of the Company. These stock options have
a ten-year term from the grant date, with
F-22
During the year ended October 31, 2023, the Company
recognized stock option expense of $
On November 9, 2022, non-qualified stock options
exercisable for up to shares of Common Stock were awarded to one supplier of the Company. These stock options have a ten-year
term from the grant date, with the shares fully vested on the issue date. The fair value of the options on the grant date was $
On November 9, 2022, non-qualified stock options exercisable
for up to shares of Common Stock were awarded to one supplier of the Company. These stock options have a ten-year term from the
grant date, with the shares fully vesting based on the achievement of certain net revenue and profit margin targets up to $
On February 6, 2023, non-qualified stock options
exercisable for up to
shares of Common Stock were awarded to five employees of the Company. These stock options have a ten-year term from the grant date,
with the shares vesting on 50% on February 6, 2024. The fair value of the options on the grant date was $
On February 6, 2023, non-qualified stock options
exercisable for up to shares of Common Stock were awarded to two senior executives of the Company. These stock options have a
ten-year term from the grant date, with the shares fully vesting on February 6, 2023 and the remaining % vesting on February 6, 2024. The fair value of the options on the grant date
was $
On February 6, 2023, non-qualified stock options
exercisable for up to shares of Common Stock were awarded to three independent board members of the Company. These stock options
have a ten-year term from the grant date, with the shares fully vesting on February 6, 2024. The fair value of the options on the grant
date was $
On February 6, 2023, non-qualified stock options
exercisable for up to shares of Common Stock were awarded to one consultant acting as a sales broker for the Company. These stock
options have a ten-year term from the grant date, with the shares fully vesting based on the achievement of certain net revenue targets
up to $
On March 3, 2023, non-qualified stock options
exercisable for up to
shares of Common Stock were awarded to one interim senior executive of the Company. These stock options have a ten-year term from
the grant date, with the shares fully vesting on June 30, 2023. The fair value $12.87 of the options on the grant date was $
F-23
On March 19, 2023, non-qualified stock options exercisable
for up to shares of Common Stock were awarded to two independent board members of the Company. These stock options have a ten-year
term from the grant date, with the shares fully vesting on March 19, 2024. The fair value of the options on the grant date was $
On July 8, 2023, incentive stock options
exercisable for up to
shares of Common Stock were awarded to one employee of the Company. These stock options have a ten-year term from the grant date,
with the shares vesting 25% annually through July 8, 2027. The fair value of the options on the grant date was $
On August 1, 2023, incentive stock options exercisable
for up to shares of Common Stock were awarded to two senior executives of the Company. The fair value of the options on the grant date was $
On August 22, 2023, incentive stock options exercisable
for up to shares of Common Stock were awarded to one senior executive of the Company. The fair value of the options on the grant date 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 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 of the Board finalized the program in February 2022 and approved it 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 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. Please reference the Stock Options disclosure above.
F-24
Warrants
Summary Warrant Shares information is as follows:
| Schedule of warrant information | ||||||||||||||||
| Aggregate | Aggregate | Exercise | Average | |||||||||||||
| Number | Exercise Price | Price Range | Exercise Price | |||||||||||||
| Outstanding, October 31, 2021 | $ | $ | $ | |||||||||||||
| Granted | ||||||||||||||||
| Exercised | ( |
) | ( |
) | ||||||||||||
| Cancelled, forfeited, or expired | ||||||||||||||||
| Outstanding, October 31, 2022 | ||||||||||||||||
| Granted | - | |||||||||||||||
| Exercised | ||||||||||||||||
| Cancelled, forfeited, or expired | ||||||||||||||||
| Outstanding, October 31, 2023 | $ | $ | - | $ | ||||||||||||
| Exercisable, October 31, 2023 | $ | $ | - | $ | ||||||||||||
The outstanding warrants as of October 31, 2023 and 2022 have a weighted average remaining contractual life of years and years, respectively, and an intrinsic value of $ for both periods.
As part of the Company’s underwritten
public offering in September 2021, the Company issued warrants to purchase a total of
The Company issued a common stock purchase warrant
to purchase an aggregate of shares of Common Stock as consideration for the acquisition of the GoFire Purchased Assets. The Warrant
is exercisable for a period of four (4) years from the Closing Date. The exercise price for the Warrant Shares is $
The Company issued a common stock purchase warrant
to purchase an aggregate of shares of Common Stock as compensation for advisory services rendered directly related to the GoFire
APA. The warrant is exercisable for a period of five (
F-25
The Company entered into a financial advisor and
placement agent agreement in April 2023 with an advisor. As part of the consideration for the advisor’s services, the Company will
issue warrants to purchase an aggregate of
The Company entered into a financial advisor and
placement agent agreement in August 2023 with an advisor. As part of the consideration for the advisor’s services, the Company
issued warrants to purchase an aggregate of
The Company determined the fair value of the warrants using the Black-Scholes option-pricing model with the following assumptions:
| Schedule of fair value of the warrants | ||||
| Expected term (years) | ||||
| Expected volatility | % - | % | ||
| Risk-free interest rate | % - | % |
The expected term represents the contractual term of the warrant. The expected volatility was based on the Company’s observed equity volatility over the period matching the term of the warrant. The assumed discount rate was the risk-free rate based on the rate of treasury securities with the same or similar term as warrant.
Note 9 – Related-Party Transactions
Revenue and Accounts Receivable
During the fiscal year ended October 31, 2023, the
Company recognized revenue of $
During the fiscal year ended October 31, 2022, the
Company recognized revenue of $ $
Purchases and Accounts Payable
During the fiscal year ended October 31, 2023, the
Company purchased Products equal to $
During the fiscal year ended October 31, 2022, the
Company purchased Products equal to $
The KBI License agreement provides that KBI shall
pay Bidi license fees equivalent to
F-26
Office Space and Other Leases
On June 10, 2022, the Company entered into a Lease Agreement (the “2022 Lease”) with Just Pick, LLC for approximately 21,332 rentable square feet combined in the office building and warehouse located at 4460 Old Dixie Highway, Grant-Valkaria, Florida 32949 (the “Premises”), together with all improvements thereon. Just Pick, LLC is considered a related party to the Company because the Company’s Chief Science Officer and director, Mr. Nirajkumar Patel, owns and controls Just Pick, LLC. See also Note 7. We believe our office space is sufficient to meet our current needs.
During the fiscal year ended October 31, 2021, the Company was part of a five-year lease agreement with Just Pick, LLC (a related party), which began on August 1, 2020. The Company was not yet being charged for the leased space under the terms and conditions of the lease between the Company and Just Pick, LLC. Accordingly, no payments were made on the lease during the fiscal year ended October 31, 2022. The lease ended in the same year of signing the previously mentioned lease with Just Pick, LLC on June 10, 2022.
Concentration of Purchases and Other Receivable - Related Party
For the year ended October 31, 2023, 100% of the
inventories of Products, consisting solely of the BIDI® Stick, were purchased from Bidi, a related party company that is owned by
Nirajkumar Patel, our Chief Science and Regulatory Officer and director, in the amount of $
On April 29, 2022, the Company and Bidi agreed to cancel the $2,295,000 inventory order paid in advance in fiscal year 2021 and this was a credit against the accounts payable due to Bidi. Inventory quality control expenses were paid by the Company on behalf of Bidi during the year ended October 31, 2022, in the amount of approximately $723,000, and were offset as a credit against the accounts payable balance-related party. A credit of $2,924,655 was applied on August 1, 2022, resulting in a related-party receivable balance due from Bidi of $2,134,413, to be applied on future product orders. On October 31, 2022, the Company and Bidi agreed to a return for short-coded or expiring inventory. An additional credit of $1,543,545 and $108,841 for recycling cost was applied on October 31, 2022, to the related-party receivable balance due from Bidi.
As of October 31, 2022, the Company has a related-party receivable balance due from Bidi of $3,704,132, in which $1,539,486 of the receivable is classified as current and $2,164,646 is classified as non-current. The receivable balance will be realized though Bidi applying 5% credits on all future orders of product until the entire balance is extinguished.
On October 31, 2023, the remaining related-party
receivable balance from Bidi of $2,954,470 was applied against our related party accounts payable balance.
After this was applied, we had no related party receivable balance. As of October 31, 2023, the related party accounts
payable balance related to purchase of inventories was $1,521,491. There was
Note 10 – Income Tax
The Company is subject to federal income taxes and state income tax in the U.S. Significant judgment is required in determining the provision for income taxes and income tax assets and liabilities, including evaluating uncertainties in the application of accounting principles and complex tax laws.
The Tax Cuts and Jobs Act (the “Tax Act”)
was enacted on December 22, 2017 and reduced the U.S. federal corporate tax rate from
Significant components of the tax expense (benefit) recognized in the accompanying statements of operations for the years ended October 31, 2023, and October 31, 2022, are as follows:
| Schedule of components of income tax expense | ||||||||
| October 31, | ||||||||
| 2023 | 2022 | |||||||
| Current Tax Expense: | ||||||||
| Federal | $ | $ | ||||||
| State | ( |
) | ||||||
| Total Current Tax Expense | ( |
) | ||||||
| Deferred Tax Expense: | ||||||||
| Federal | ||||||||
| State | ||||||||
| Total Deferred Tax Expense | ||||||||
| Tax provision: | ||||||||
| Federal | ||||||||
| State | ( |
) | ||||||
| Total | ( |
) | ||||||
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Total net deferred taxes are comprised of the following on October 31, 2022, and October 31, 2023:
| Schedule of deferred tax assets and liabilities | ||||||||
| October 31, | ||||||||
| 2023 | 2022 | |||||||
| Deferred Tax Assets: | ||||||||
| Stock Compensation Expense – NQSO | $ | $ | ||||||
| Other | ||||||||
| Net Operating Loss Carryforwards | ||||||||
| Total Deferred Tax Asset | ||||||||
| Deferred Tax Liabilities: | ||||||||
| Prepaid Expenses | ( |
) | ( |
) | ||||
| Right of Use Asset | ( |
) | ( |
) | ||||
| Total Deferred Tax Liabilities | ( |
) | ( |
) | ||||
| Less: Valuation Allowance | ( |
) | ( |
) | ||||
| Net Deferred Tax Asset | ||||||||
The Company has Federal NOL carryforwards of
approximately $23.8 million and state NOL carryforwards of approximately $186,000. With the changes instituted by the CARES Act,
the Federal NOLs have an indefinite life and will not expire. The Company’s federal and state tax returns for the 2022 and 2021
tax years generally remain subject to examination by U.S. and various state authorities. A valuation allowance is recorded to reduce
the deferred tax asset if, based on the weight of the evidence, it is more likely than not that some portion or all the deferred tax
assets will not be realized. After consideration of all the evidence, both positive and negative, management has determined that a valuation
allowance of $
Note 11 – 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
Consulting Agreements
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 shares of Common Stock in exchange for consulting services. The shares underlying the stock options fully vested on December 1,
2021. The exercise price per share was $
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On December 1, 2021, the Company and Russell Quick
agreed to renew his consulting agreement for one year, pursuant to which on May 18, 2022, the Company granted non-qualified stock options
exercisable for up to shares of the Common Stock in exchange for on-going consulting services. The shares underlying the stock
options fully vest on December 1, 2022. They have a -year expiration. The exercise price per share is $. The Company recognized
approximately $434,000 in expense to account for the stock options in the fiscal year ended October 31, 2022. The Company accrued approximately
$
On February 4, 2022, the
On August 1, 2022, the Company approved the grant of a stock option award to an employee, to acquire up to shares of Common Stock under the Company’s Amended 2020 Stock and Incentive Compensation Plan. The option shares vest on August 1, 2023 and are exercisable at a price of $ per share, which equaled the closing price of the Common Stock as of the date immediately prior to the grant date. The option has a ten-year term. 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 August 24, 2022, Company approved amending the Consulting Agreement for Mark Thoenes, the Company’s then Interim Chief Financial Officer, in order to extend its term, modify the vesting terms of the previously granted stock option award, and approved the grant of a stock option award to acquire up to shares of Common Stock under the Company’s Amended 2020 Stock and Incentive Compensation Plan. The option shares vest on August 24, 2022 and are exercisable at a price of $ per share, which equaled the closing price of the Common Stock as of the date immediately prior to the grant date. The option has a ten-year term. 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 October 28, 2022, The Company
entered into a settlement agreement with a customer in the amount of $
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Executive Compensation
On May 28, 2020, the Board approved cash bonus awards
to each of Nirajkumar Patel, the Company’s then Chief Executive Officer, and Eric Mosser, the Company’s then 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.
On March 5, 2022, the Company granted a stock option award to Nirajkumar Patel, then the Company’s Chief Executive Officer, to acquire up to 28,572 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 $59.85 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, the Company’s then Chief Operating Officer, to acquire up to 23,810 shares of Common Stock under the Company’s 2020 Stock and Incentive Compensation Plan, as partial compensation for Mr. Mosser’s services as Chief Operating Officer. The option shares are exercisable at a price of $59.85 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 June 24, 2022, the Company granted a stock option award to Nirajkumar Patel, Chief Science and Regulatory Officer, to acquire up to shares of Common Stock under the Company’s 2020 Stock and Incentive Compensation Plan, as partial compensation for Mr. Patel’s services as Chief Science and Regulatory Officer. The option shares are exercisable at a price of $ per share, which equaled the closing price of the Common Stock as of the date immediately prior to the grant date. 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 June 24, 2022, the Company granted stock option awards to Eric Mosser, the Company’s then President and Chief Operating Officer, to acquire up to shares of Common Stock under the Company’s 2020 Stock and Incentive Compensation Plan, as partial compensation for Mr. Mosser’s services as President and Chief Operating Officer. The option shares are exercisable at a price of $ per share, which equaled the closing price of the Common Stock as of the date immediately prior to the grant date. 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.
QuikfillRx 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.
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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”) with QuikfillRx. Effective as of June 24, 2022, the Company entered into the Fourth Amendment to the Service Agreement (the “Fourth Agreement” and, collectively with the First Amendment, Second Amendment, Third 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, the Company paid QuikfillRx an amount equal to $86,000; (ii) for the Services provided in April 2020, the Company paid QuikfillRx an amount equal to $100,000; (iii) each calendar month commencing May 2020 through October 2020, the Company paid QuikfillRx an amount equal to $100,000 per month for the Services to be performed during such calendar month; (iv) for each calendar month between November 1, 2020 and October 31, 2021, the Company paid QuikfillRx $125,000 per month for the Services to be performed during such calendar month; (iv) for the period between November 1, 2021 and June 30, 2022, the Company paid QuikfillRx $150,000 per month for the Services to be performed during such calendar month; (v) for the period between July 1, 2022 and October 31, 2024, the Company will pay QuikfillRx $125,000 per month for the Services to be performed during such calendar month; and (vi) parties acknowledged that as a result of extensions to the term of the Service Agreement , such term of the Original Agreement will end on October 31, 2023. The parties have agreed to extend such term for an additional one year until October 31, 2024. In addition, the Company will pay the following quarterly bonuses:
| ● | 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. |
During fiscal year 2023, the Company accrued approximately
$
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Note 12 – Subsequent Events
Reverse Stock Split
On January 22, 2024, the Company filed a Certificate of Amendment to the Company’s Amended and Restated Certificate of Incorporation with the Secretary of State of the State of Delaware to affect a 1-for-21 reverse stock split (the “2024 Reverse Stock Split”) of the shares of the Common Stock. The 2024 Reverse Stock Split was effective on January 25, 2024 on the Nasdaq Stock Market. No fractional shares were issued in connection with the 2024 Reverse Stock Split. Any fractional shares of our Common Stock that would have otherwise resulted from the 2024 Reverse Stock Split were rounded up to the nearest whole number. In connection with the 2024 Reverse Stock Split, the Board approved appropriate and proportional adjustments to all outstanding securities or other rights convertible or exercisable into shares of the Common Stock, including, without limitation, all preferred stock, warrants, options, and other equity compensation rights. All historical share and per-share amounts reflected throughout the accompanying consolidated financial statements and other financial information in this Report have been retroactively adjusted to reflect the 2024 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 2024 Reverse Stock Split.
Repayment of AJB Note
On
December 1, 2023, the Company repaid all amounts due and owing under the Note to AJB in full, in an aggregate amount, including accrued
interest, equal to $
Receivables Purchase Transactions
On November 29, 2023, the Company entered into two receivables purchase transactions pursuant to: (i) a Future Receivables Sale and Purchase Agreement, dated November 29, 2023, between Clearview Funding Solutions LLC (“Clearview”) and the Company (the “Clearview Agreement”), and (ii) a Future Receivables Sale and Purchase Agreement, dated November 29, 2023, between Mr. Advance LLC (“Advance”) and the Company (the “Advance Agreement”).
Pursuant
to the Clearview Agreement, the Company sold future receivables in the principal amount of $
Pursuant
to the Advance Agreement, the Company sold future receivables in the principal amount of $
Common Stock Transaction
On December 15, 2023 the Company issued shares of common stock to a FINRA member broker-dealer in connection with the termination of its relationship with such broker dealer.
Stock Options Transactions
On February 8, 2024 (the "Grant Date"), Barry M. Hopkins received a 10-year incentive stock option grantto purchase 63,881 shares of Common Stock in partial consideration of his employment services to the Company. The exercise price of such grant option is $5.25 per share, equal to the fair market value of the Issuer's cCommon sStock on November 9, 2023, which is the effective date of the Reporting Person's Mr. Hopkins’ employment agreement with the IssuerCompany. The option shall vest over four years. One-quarter of the option shall vest on the first anniversary of the Ggrant Ddate and afterward shall vest monthly at the rate of 1/36 per month until fully vested.
In connection with his appointment to the Company’s board of directors, on May 30, 2023, James P. Cassidy received a 10-year non-qualified stock option to purchase 5,953 shares of Common Stock with an exercise price of $11.76 per share, the fair market value of the Common Stock on May 30, 2023. In connection with Mr. Cassidy’s resignation from the board of directors on January 25, 2024, he agreed that such option should be terminated and cancelled.
F-32
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
We maintain “disclosure controls and procedures,” as such term is defined in Rule 13a-15e and Rule 15d-15(e) under the Exchange Act that are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our President & Chief Operating Officer and our Interim Chief Financial Officer to allow for timely decisions regarding required disclosure.
As of October 31, 2023, the end of the year covered by this Report, we carried out an evaluation under the supervision and with the participation of members of our management, including our President & Chief Operating Officer and our Chief Financial Officer, of the effectiveness of the design and the operation of our disclosure controls and procedures pursuant to Rule 13a-15(b) of the Exchange Act. Our management has concluded, based on their evaluation, that the disclosure controls and procedures were not effective as of the end of the year covered by this Report due to material weaknesses identified below.
Management’s Annual Report on Internal Control Over Financial Reporting
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 was ineffective, taken as a whole, as of October 31, 2023, 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. However, management has been in the process of implementing new controls that should mitigate, if not fully eliminate certain identified risks in our control over financial reporting.
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 Report, including implementing procedures pursuant to which we can ensure proper 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.
41
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.
Auditor’s Report on Internal Control Over Financial Reporting
This Report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our independent registered public accounting firm pursuant to the rules of the SEC that permit us to provide only management’s report in this Report.
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 fourth quarter ended October 31, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information.
None.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not Applicable.
Item 10. Directors, Executive Officers and Corporate Governance.
The following table and text set forth the names and ages of our directors and executive officers as of the date of this Report. Our board of directors (the “Board”) is comprised of only one class of directors. Also provided herein are brief descriptions of the business experience of each director and executive officer during the past five years (based on information supplied by them) and an indication of directorships held by each director in other public companies subject to the reporting requirements under the Federal securities laws. During the past ten years, none of our directors or executive officers has been involved in any legal proceedings that are material to an evaluation of the ability or integrity of such person:
| Name | Age | Position(s) | Dates in Position or Office | |||||
| Nirajkumar Patel (1) | 40 | Chief Science & Regulatory Officer and Director | June 24, 2022– Current | |||||
| Barry M. Hopkins (2) | 72 | Director, Executive Chairman and Interim Chief Executive Officer and President | March 19, 2023– Current | |||||
| Roger Brooks (3) | 78 | Director | March 17, 2021– Current | |||||
| George Chuang (4) | 55 | Director | June 30, 2021– Current | |||||
| David Worner (5) | 45 | Director | March 19, 2023– Current | |||||
| Mark Thoenes (6) | 70 | Director | August 1, 2023 – Current | |||||
| Stephen Sheriff (7) | 34 | Chief Operating Officer and Investor Relations Officer | August 22, 2023– Current | |||||
| Thomas Metzler (8) | 47 | Chief Financial Officer, Treasurer, and Secretary | August 1, 2023– Current | |||||
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| (1) | Mr. Patel served as our Chief Executive Officer and Chief Financial Officer from February 20, 2019, until June 24, 2022. |
| (2) | Mr. Hopkins was appointed as our Executive Chairman on November 6, 2023 and Interim Chief Financial Officer and President on December 22, 2023. |
| (3) | Mr. Brooks serves as Chair of the Audit Committee and a member of the Governance and Nominating, and Compensation Committees. |
| (4) | Mr. Chuang serves as a member of the Compensation, Audit and Governance and Nominating Committees. |
| (5) | Mr. Worner serves as chair of the Compensation Committee and a member of the Audit and Governance and Nominating Committee. |
| (6) | Mr. Thoenes was appointed to the Board effective August 1, 2023. From June 30, 2021 until August 1, 2023, he served as our Interim Chief Financial Officer. |
| (7) | Mr. Sheriff was appointed as our Chief Operating Officer on August 22, 2023. |
| (8) | Mr. Metzler was appointed as our Chief Financial, Treasurer, and Secretary of our company on August 1, 2023. |
Nirajkumar Patel, Chief Science & Regulatory Officer, and Director. Nirajkumar Patel attended AISSMS College of Pharmacy in Pune, India and received a Bachelor of Science Degree in Pharmacy in 2004. After moving to the United States in 2005, Mr. Patel became a United States citizen in 2008 and obtained a master’s degree in chemistry from the Florida Institute of Technology in 2009. Mr. Patel is a prominent local businessman in Brevard County, Florida. In 2017 and 2018, Mr. Patel served as Vice President for the Board of the Indian Association of the Space Coast, located in Brevard County, Florida. Mr. Patel founded, and has served as a Board member of, the Florida Independent Liquor Stores Owners Association since 2017. In 2013, Mr. Patel launched Just Chill Products LLC, a highly successful developer/manufacturer of high-end CBD products and has served as its Chief Executive Officer and Chief Science Officer since 2017. In 2017, Mr. Patel created Relax Lab Inc., a producer/manufacturer of a CBD relaxation beverage, and currently serves as its Chief Executive Officer and Chief Science Officer. In 2017, Mr. Patel also created RLX Lab LLC, a producer/manufacturer of a non-CBD relaxation beverage, and currently serves as its Chief Executive Officer and Chief Science Officer. In 2017, Mr. Patel also founded KC Innovations Lab Inc., a CBD white-label manufacturing service and developer/producer of best-selling white-label CBD products including cosmetics, edibles, beverages, topicals, and vape oils, and currently serves as its Chief Executive Officer and Chief Science Officer. Additional companies that are owned by Nirajkumar Patel, the Chief Science & Regulatory Officer and director of our company, and/or his wife include Beach Food Store created in 2004, Diya Food Store created in 2010, Cloud Nine 2012 created in 2012, JC Products of USA, LLC created in 2013 and Just Pick, LLC. We believe that Mr. Patel is qualified to serve on our Board because of his prior and current management experience, as well as his business experience within our business industry.
Barry M. Hopkins, Executive Chairman and Interim Chief Executive Officer and President. Mr. Barry Hopkins has decades of experience in business development, performance management, and retail, having spent over thirty years with Altria, one of the world’s largest producers and marketers of tobacco, cigarettes and related products. While at Altria, Mr. Hopkins served in various roles, including District Manager, Vice President of Sales, Vice President of Trade Marketing, and Vice President of National accounts. In 2005, Mr. Hopkins founded Ideas in Motion, a consulting company. For seven years while running Ideas in Motion, Mr. Hopkins consulted with Turning Point Brands, a consumer products company that markets and distributes products including alternative smoking accessories and consumables. Mr. Hopkins eventually joined Turning Point Brands in 2012 as a Senior Executive and gradually transitioned to other senior level roles including Senior Vice President of Sales and Marketing, and Senior Vice President of Executive Organizational Development. Mr. Hopkins remained at Turning Point Brands for over eleven years and, while there, garnered recognition for the development and implementation of a systematic connection process that ultimately resulted in eight record setting quarters exceeding all prior sales and profit objectives.
43
Roger Brooks, Director. Mr. Roger Brooks has served as the Chairman, Treasurer, and Co-founder of Abierto Networks, a digital media and engagement technology company focused on the convenience store, retail, and other similar consumer market segments, since 2005. At Abierto Networks, Mr. Brooks has also served on the Compensation Committee since 2005. Prior to his roles at Abierto Networks, from 1998 to 2008, Mr. Brooks was the lead independent director and member of the compensation and audit committees for Moldflow Corporation, a Nasdaq-listed software company that was sold to Autodesk, Inc. in 2008. From February 2016 to June 2019, Mr. Brooks served as an independent director of Lytron, Incorporated, a closely held international industrial solutions company. From 1998 to 2002, Mr. Brooks served as President, Chief Executive Officer, and member of the board for Intelligent Controls, Inc., a publicly traded software and instrumentation company, which was sold to Franklin Electric Co. Inc. Mr. Brooks was President, Chief Executive Officer, and a board member of Dynisco, Inc. from 1987 to 1996 where he grew the company from $10 million of sales to an international company with over $100 million of sales. Mr. Brooks holds a Bachelor of Arts degree from the University of Connecticut and a Master of Business Administration degree from New York University, Stern Graduate Business School. He is also a graduate of the Stanford University Executive Management Program. Mr. Brooks extensive experience gained from his roles as an executive officer and director of numerous public companies, as well as experience in the convenience store, retail, and other consumer markets will be invaluable to the Board and qualifies him for service as a director.
George Chuang, Director. Mr. George Chuang has served as the Chief Executive Officer of Lucy Labs, Inc. since July 2017 and as the Chair of the Board of Directors of Lucy Labs, Inc. since November 2021. Prior to that, he served as the co-managing principal of Hillside Advisors LLC from June 2015 to July 2017. Mr. Chuang was also the principal owner of USB Media, Inc., a technology B2B company he founded in 2007. During his career, Mr. Chuang spent time at Chase Manhattan Bank as an assistant Treasurer for their Credit Risk Department, as a management consultant at Price Waterhouse Management Consulting, and served as the Chief Administrative Officer for several equity product sales groups at Lehman Brothers. In addition, Mr. Chuang spent eight years as a Principal at Pacific Partnership Advisors LLC, a consulting firm with offices in New York and Beijing, which facilitated cross-border transactions. Mr. Chuang graduated from the University of Chicago and obtained a Master of Business Administration degree at Yale University. Mr. Chuang’s experience in capital markets and global supply chain knowledge, as well as his business experience in start-up companies, qualifies him for service as a director.
David Worner, Director. Mr. David Worner began his career in public accounting and is currently the Chief Executive Officer of GrowthPath Partners, a transactional accounting and advisory firm which he founded in July 2021. From August 2012 to June 2021, Mr. Worner served as a partner at NOW CFO, a national finance and accounting consulting firm. Prior to his time at NOW CFO, Mr. Worner worked as a Controller at Covario, an independent provider of search marketing agency services, from August 2010 until August 2012. Prior to his time at Covario, from September 2006 to August 2012, he worked as an Accounting Manager for Securities and Exchange Commission Reporting and SOX Management for NTN Buzztime, a company that produces interactive entertainment across different platforms. Mr. Worner received a bachelor’s degree in accounting from the University of New Orleans in 2005.
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Mark Thoenes, Director. Mr. Mark Thoenes, has more than 35 years of diverse financial and operational leadership to our company. From June 30, 2021 to August 1, 2023, he served as our Interim Chief Financial Officer on a consulting basis. He has been a licensed Certified Public Accountant since 1984 and began his career with Ernst & Young Global Limited. From 2000 to 2010, Mr. Thoenes served as the Executive Vice President/Chief Financial Officer of Rentrak Corporation (“Rentrak”), a publicly traded company listed on Nasdaq and headquartered in Portland, Oregon. Founded in 1977, Rentrak went public in 1986, and remained a public company until it was acquired by comScore, Inc. in 2016, after Mr. Thoenes left Rentrak. For the past eleven years, Mr. Thoenes has been the President of MLT Consulting Services, LLC, a full-service business/financial consulting firm.
Stephen Sheriff, Chief Operating Officer and Investor Relations Officer. Mr. Stephen Sheriff brings over a decade of finance and entrepreneurial leadership to his role as Chief Operating Officer and Investor Relations Office. Since August 2022, he has served as our Director of Administration & Communications. In this role, he managed our investor, public relations and human resource programs in addition to overall responsibility for the development and implementation of key programs and initiatives, including customer and vendor relations. Since January 2022, he has also served as co-founder and Managing Partner of Riverhill Group, a management consulting firm focused on assisting early-stage companies in the areas of funding, scaling and expanding operations. Since 2012, he has also been a Managing Partner at Riverhill Ventures, a socially conscious, strategic investment and consulting firm primarily focused on quick service restaurants, natural foods and consumer brands. Through his Riverhill-related experiences, Mr. Sheriff has been an investor in and advisor to several early-stage companies. From September 2018 to September 2020, he also was an Associate at Solebury Trout (now Solebury Strategic Communications), a leading life sciences-focused investor relations firm based in New York City. Mr. Sheriff received his Bachelor of Arts in Counseling Psychology from Delaware Valley University.
Thomas Metzler, Chief Financial Officer, Treasurer, and Secretary. Mr. Thomas Metzler brings over 20 years of finance and operational experience in the vaping and consumer products sector to our company. Since June 2019, he has worked as an accounting and operational consultant. From April 2013 to June 2019, Mr. Metzler served as Managing Director of a Division of Turning Point Brands (NYSE: TPB), a manufacturer, marketer and distributor of branded alternative smoking accessories and consumables with active ingredients. At Turning Point Brands, Mr. Metzler led a team to transform the process of financial management efficiencies, which improved cost controls, managed inventory turn, developed strategic product promotions to accelerate product distribution, and built strategic alliances with suppliers. Mr. Metzler also developed & monitored key performance indicators which generated record growth with retail and wholesale distributors. He also provided post-acquisition assistance to integrate newly acquired entities into Turning Point Brands and advocated for the vapor industry by meeting with the White House’s OMB/OIRA office, and various congressional and senatorial offices. Mr. Metzler was a significant contributor as a Standard Technical Panel member in developing UL 8139- Electrical Systems of Electronic Cigarettes and Vaping Devices, a safety standard that evaluates the electrical and battery systems of vaping devices and electronic cigarettes. Mr. Metzler was a licensed CPA for over 20 years, during which time he provided accounting and related consulting services to many companies. He began his career working with public and private companies in the assurance practice at PricewaterhouseCoopers LLP in Boston. Mr. Metzler earned a B.S. in Accounting from Canisius College.
December 2023 Management Changes
On December 21, 2023, Eric Mosser, the Company’s then Chief Executive Officer and President of our company, provided written notice to our board of directors of his resignation as a member of the board, effective immediately. Mr. Mosser’s resignation is not due to any disagreements between him and our company or our board of directors.
In connection with his resignation, on December 21, 2023, we and Mr. Mosser entered into an amendment to Mr. Mosser’s employment agreement with our company, dated August 1, 2023. Pursuant to such amendment, effective December 21, 2023, Mr. Mosser resigned as Chief Executive Officer and President of our company and became a Senior Advisor to our company and the Chief Executive Officer of KBI. Mr. Moser will report to Barry M. Hopkins, our Executive Chairman, until such time as a new Chief Executive Officer and President are appointed. At such time, Mr. Mosser shall report to our Chief Executive Officer as a Senior Advisor. Pursuant to the Amendment, Mr. Mosser’s base salary shall be $251,000 per annum, effective as of January 1, 2024.
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On December 22, 2023, our board of directors appointed Mr. Hopkins as Interim Chief Executive Officer and President of our company, to serve in such capacity until a successor is duly appointed and approved by our board. Mr. Hopkins is our principal executive officer.
Executive Chairman
On November 6, 2023, our Board, pursuant to the powers of the Board provided for under applicable Delaware law, approved the creation of the new officer position of Executive Chairman and appointed Barry M. Hopkins, the then Chairman of the Board, to the office of Executive Chairman. The duties and responsibilities of the Executive Chairman are as follows:
1. The Executive Chairman acts as the principal executive officer of our company, with the President and Chief Executive Officer continuing to have primary responsibility for managing our day-to-day operations under the supervision of the Executive Chairman. The Executive Chairman shall provide advice and consultation to our President and Chief Executive Officer and our other officers regarding the overall management of our business and affairs, All significant strategic initiatives and projects of our company require prior consultation with and approval by the Executive Chairman.
2. Define our strategic direction and, working with the President and Chief Executive Officer and other officers of our company, ensure that our strategic direction is (a) properly communicated to the Board for its approval as required or deemed appropriate and (b) implemented by our company.
3. Chair annual and special Board meetings and annual stockholder meetings and, subject to availability and invitation, attend meetings of the committees of the Board.
4. Provide guiding principles for the proper functioning of Board and its committees in accordance with applicable laws, rules and regulations.
5. Foster and promote the integrity of the Board and a culture where the Board works harmoniously for the long-term benefit of our company and its stockholders.
6. Act as liaison between the Board and our officers to ensure that strategic policy and other decisions of the Board are fully presented to and discussed, debated, and decided by the Board.
7. Consult with Board members outside the regularly scheduled meetings of the Board as required.
8. Ensure that there is efficient communication among the Executive Chairman, the President and Chief Executive Officer, and our other officers and employees and Board members.
9. Partner with the President and Chief Executive Officer, work to strengthen our relationships with existing customers and foster key relationships that lead to new business. In this regard, the Executive Chairman will act as our representative with current and potential commercial partners and also potential sources of financing.
Family Relationships
There are no family relationships among any of our directors or executive officers.
Arrangements
Other than with respect to the Series B Director as described under “Description of Capital Stock-–-Preferred Stock—Series B Preferred Stock—Series B Director”, there are no arrangements or understandings between an executive officer or director and any other person pursuant to which he was selected as an executive officer or director.
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Directors and Executive Officers Qualifications
Although we have not formally established any specific minimum qualifications that must be met by each of our officers, we generally evaluate the following qualities: educational background, diversity of professional experience, including whether the person is a current or was a former chief executive officer or chief financial officer of a public company or the head of a division of a prominent international organization, knowledge of our business, integrity, professional reputation, independence, wisdom, and ability to represent the best interests of our stockholders.
The Governance and Nominating Committee of the Board prepares policies regarding director qualification requirements and the process for identifying and evaluating director candidates for adoption by our Board. The above-mentioned attributes, along with the leadership skills and other experiences of our officers and Board members described above, provide us with a diverse range of perspectives and judgment necessary to facilitate our goals of stockholder value appreciation through organic and acquisition growth.
Director Independence
Under Nasdaq standards, a director is not “independent” unless the Board affirmatively determines that he or she does not have a direct or indirect material relationship with us or any of our subsidiaries. In addition, the director must meet the bright-line tests for independence set forth by the Nasdaq rules. Our Board has undertaken a review of its composition, the composition of its committees and the independence of our directors and considered whether any director has a material relationship with us that could compromise his ability to exercise independent judgment in carrying out his responsibilities. Based on these standards, the Board has determined that Messrs. Worner, Brooks, and Chuang are “independent” directors within the meaning of listing rules of the Nasdaq Stock Market.
All the members of the Audit, Compensation and Governance and Nominating Committees were also independent during our fiscal year ended October 31, 2023. Our Board is presently considering changes to the composition of the Compensation and Governance and Nominating Committees given Mr. Hopkins’ assumption of the role as our principal executive officer in November 2023. In making determinations regarding director independence, our Board considered the relationships that each non-employee director has with us and all other facts and circumstances our Board deemed relevant in determining their independence, including the director’s beneficial ownership of our Common Stock and the relationships of our non-employee directors with certain of our significant stockholders.
Meetings of the Board and Board Committees
Our Board has an Audit Committee, a Compensation Committee and Governance and Nominating Committee. The entire Board met 10 times, including telephonic meetings, during fiscal 2023. All directors attended at least 75% of our Board meetings held during the time each director served on our Board.
Audit Committee. The Audit Committee currently consists of Roger Brooks (Chair), David Worner and George Chuang. The Audit Committee met 4 times during fiscal 2023. The meetings included discussions with management and with our independent registered public accounting firm to discuss our interim and annual financial statements, and the effectiveness of our financial and accounting functions and organization. The Audit Committee acts pursuant to a written charter adopted by our Board, a copy of which can be accessed at our corporate website at https://ir.kaivalbrands.com/governance/governance-documents/default.aspx. Changes to this charter from time to time will be posted on our website at such address.
The purpose of the Audit Committee is to represent and assist the Board in its general oversight of our accounting and financial reporting processes, audits of our financial statements, and our internal control and audit functions. Management is responsible for (a) the preparation, presentation, and integrity of our financial statements; (b) accounting and financial reporting principles; and (c) our internal controls and procedures designed to promote compliance with accounting standards and applicable laws and regulations. Our independent registered public accounting firm is responsible for performing an independent audit of our consolidated financial statements in accordance with generally accepted auditing standards.
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Our Board has determined that the Audit Committee is comprised entirely of independent members as defined under applicable SEC rules and the Nasdaq Rules. Our Board has determined that Mr. Brooks, the Chair of the Audit Committee, is an “audit committee financial expert” as defined under SEC rules.
Compensation Committee. The Compensation Committee currently consists of David Worner (Chair), Barry Hopkins and Roger Brooks. The Compensation Committee met 6 times during fiscal 2023. Our Board is presently considering changes to the composition of the Compensation Committee given Mr. Hopkins’ assumption of the role as our principal executive officer in November 2023. The Compensation Committee acts pursuant to a written charter adopted by our Board, a copy of which can be accessed at our corporate website at https://ir.kaivalbrands.com/governance/governance-documents/default.aspx. Changes to this charter from time to time will be posted on our website at such address.
The purpose of the Compensation Committee is to discharge the responsibilities of the Board relating to compensation of our executives, to produce an annual report on executive compensation for inclusion in our annual proxy statement, and to oversee and advise the Board on the adoption of policies that govern our compensation programs, including stock and benefit plans.
The Compensation Committee is responsible for determining executive compensation, including approving recommendations regarding equity awards for all of our executive officers, setting base salary amounts, and fixing compensation levels. This includes reviewing and making recommendations to our Board regarding corporate goals and objectives relevant to Chief Executive Officer compensation, evaluating, at least annually, the Chief Executive Officer’s performance in light of these goals and objectives, and reviewing and making recommendations to our Board regarding the Chief Executive Officer’s compensation level based on such evaluation.
The Compensation Committee also annually reviews director compensation to ensure non-employee directors are adequately compensated for the time expended in fulfilling their duties to us, as well as the skill-level required by us of members of our Board. After the Compensation Committee completes their annual review, they make recommendations to our Board regarding director compensation. The Compensation Committee is authorized to engage compensation consultants, if they deem necessary, to assist with the Compensation Committee’s responsibilities related to our executive compensation program and the director compensation program.
Governance and Nominating Committee. The Governance and Nominating Committee currently consists of Barry Hopkins (Chair), David Worner and Roger Brooks. The Governance and Nominating Committee did not meet as such during fiscal 2023. Our Board is presently considering changes to the composition of the Governance and Nominating Committee given Mr. Hopkins’ assumption of the role as our principal executive officer in November 2023. The Governance and Nominating Committee acts pursuant to a written charter adopted by our Board, a copy of which can be accessed at our corporate website at https://ir.kaivalbrands.com/governance/governance-documents/default.aspx. Changes to this charter from time to time will be posted on our website at such address.
The purpose of the Governance and Nominating Committee is to determine the slate of director nominees for election to our Board, to identify and recommend candidates to fill Board vacancies occurring between annual stockholder meetings, to review our policies and programs that relate to matters of corporate responsibility, including public issues of significance to our company and our stockholders, and any other related matters required by the federal securities laws.
The Governance and Nominating Committee determines the qualifications, qualities, skills, and other expertise required to be a director and to develop, and recommend to our Board for its approval, criteria to be considered in selecting nominees for director. The Nominating Committee and our Board believe that at this time, it is unnecessary to adopt criteria for the selection of directors. Instead, the Nominating Committee and our Board believe that the desirable background of a new individual member of our Board may change over time and that a thoughtful, thorough selection process is more important than adopting criteria for directors.
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The Governance and Nominating Committee will also identify, recruit, and screen candidates for our Board, consistent with criteria approved by our Board. The Nominating Committee and our Board are fully open to utilizing whatever methodology is efficient in identifying new, qualified directors when needed, including industry contacts of our directors or professional search firms. The Governance and Nominating Committee also considers any director candidates recommended by our stockholders pursuant to the procedures described in this Proxy Statement and any nominations of director candidates validly made by stockholders in accordance with applicable laws, rules, and regulations, and the provisions of our charter documents.
There were no fees paid or due to third parties in fiscal 2023 to identify or evaluate, or to assist in evaluating or identifying, potential director nominees.
Director Diversity
The following chart sets forth the board diversity information required by Nasdaq for our directors as of the date of this Report:
| Board Diversity Matrix | ||||||||||||||||
| Total Number of Directors | 5 | |||||||||||||||
| Female | Male | Non-Binary | Did Note Disclose Gender | |||||||||||||
| Part I: Gender Identity | ||||||||||||||||
| Directors | — | 6 | — | — | ||||||||||||
| Part II: Demographic Background | ||||||||||||||||
| African American or Black | — | 1 | — | — | ||||||||||||
| Alaskan Native or Native American | — | — | — | — | ||||||||||||
| Asian | — | 2 | — | — | ||||||||||||
| Hispanic or Latinx | — | — | — | — | ||||||||||||
| Native Hawaiian or Pacific Islander | — | — | — | — | ||||||||||||
| White | — | 3 | — | — | ||||||||||||
| Two or More Races or Ethnicities | — | — | — | — | ||||||||||||
| LGBTQ+ | — | — | — | — | ||||||||||||
Code of Ethics
On March 17, 2021, our Board adopted a Code of Ethics and Business Conduct, that applies to all directors, senior officers, and employees of the Company (the “Code of Ethics”). The Code of Ethics was adopted to enhance and clarify our personnel’s understanding of our standards of ethical business practices, promote awareness of ethical issues that may be encountered in carrying out an employee’s or director’s responsibilities, and sets forth how to address ethical issues that may arise. A copy of the Code of Ethics is available on our corporate website at https://ir.kaivalbrands.com/governance/governance-documents/default.aspx.
Compensation Committee Interlocks and Insider Participation
None of our executive officers currently serve, or have served during the last year, as a member of the board of directors or compensation committee of any entity, other than us, that has one or more executive officers serving as a member of our Board.
Executive Compensation
Summary Compensation Table
The table below summarizes all compensation awarded to, earned by, or paid to our named executive officers, which is defined herein as (i) all individuals serving or having served as our principal executive officer or officers during the year ended October 31, 2023, (ii) each of our two other most highly compensated executive officers who were serving as executive officers at the end of the year ended October 31, 2023, and (iii) any individuals for whom disclosure would have been required but for the fact that the individual was not serving as an executive officer as of the fiscal year ended October 31, 2023.
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| Name and principal position | Fiscal Year Ended October 31, | Salary ($) | Bonus ($) | Stock Awards ($) (1) (2) | Option Awards ($) (1) | Non-Equity Incentive Plan Compensation ($) (3) | Nonqualified Deferred Compensation Earnings ($) | Total ($) | ||||||||||||||||||||||||
| Nirajkumar Patel, Chief Science & Regulatory Officer, and Director | 2022 | 244,000 | 30,000 | 42,584 | 2,139,989 | 57,709 | 0 | 2,514,282 | ||||||||||||||||||||||||
| 2023 | 276,000 | 0 | 0 | 364,994 | 0 | 0 | 640,994 | |||||||||||||||||||||||||
| Eric Mosser, former CEO, President, and Director (4) | 2022 | 226,577 | 20,000 | 37,707 | 1,854,991 | 57,709 | 0 | 2,196,984 | ||||||||||||||||||||||||
| 2023 | 300,000 | 0 | 0 | 699,941 | 0 | 0 | 999,941 | |||||||||||||||||||||||||
| Mark Thoenes, former Interim CFO(5) | 2022 | 347,201 (6) | 0 | 0 | 310,998 | 0 | 0 | 658,193 | ||||||||||||||||||||||||
| 2023 | 298,050 | 0 | 0 | 30,650 | 0 | 0 | 328,700 | |||||||||||||||||||||||||
| Thomas Metzler, CFO | 2023 | 61,076 | 0 | 0 | 150,000 | 0 | 0 | 211,076 | ||||||||||||||||||||||||
| Stephen Sheriff, COO | 2022 | 31,250 | 0 | 0 | 29,000 | 0 | 0 | 60,250 | ||||||||||||||||||||||||
| 2023 | 146,528 | 7,500 | 0 | 75,808 | 0 | 0 | 229,836 | |||||||||||||||||||||||||
| (1) | Reflects the fair value of stock awards during the years in accordance with FASB ASC 718, Compensation–- Stock Compensation, using actual forfeitures that were immaterial. For valuation assumptions related to the 2022 option awards, refer to Note 2, “Share-Based Compensation,” to the accompanying audited consolidated financial statements for the year ended October 31, 2023. | |
| (2) | Includes fair value of shares withheld by us to pay for taxes. | |
| (3) | Consisted of cash paid in lieu of vested RSUs. | |
| (4) | Mr. Mosser resigned as our Chief Executive Officer and President on December 21, 2023. Barry M. Hopkins became our Executive Chairman and principal executive officer (and later Interim Chief Executive Officer and President) following the conclusion of our fiscal year ended October 31, 2023. | |
| (5) | Mr. Thoenes resigned as our Interim Chief Financial Officer on August 1, 2023 | |
| (6) | Consulting fees pursuant to the Consulting Agreement (as defined below). See “Narrative Discussion” for additional information. |
Narrative Discussion
The following is a narrative discussion of the material information that we believe is necessary to understand disclosed in the foregoing Summary Compensation Table. The following narrative disclosure is separated into sections, with a separate section for each of our named executive officers.
On February 6, 2023, we granted stock option awards to Nirajkumar Patel, Chief Science and Regulatory Office, to acquire up to 23,810 shares of Common Stock under our 2020 Stock and Incentive Compensation Plan, as partial compensation for Mr. Patel’s services as Chief Science and Regulatory Officer. The option shares are exercisable at a price of $15.33 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 6, 2023, we granted stock option awards to Eric Mosser, our then President and Chief Operating Officer, to acquire up to 23,810 shares of Common Stock under our 2020 Stock and Incentive Compensation Plan, as partial compensation for Mr. Mosser’s services as President and Chief Operating. The option shares are exercisable at a price of $15.33 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.
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On March 3, 2023, we granted stock option awards to Mark Thoenes, then our Interim Chief Financial Officer, to acquire up to 2,381 shares of Common Stock under our 2020 Stock and Incentive Compensation Plan, as partial compensation for Mr. Thoenes’ services as Interim Chief Financial Officer. The option shares are exercisable at a price of $12.81 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 August 1, 2023, we granted stock option awards to Eric Mosser, our then Chief Executive Officer and President to acquire up to 27,004 shares of Common Stock under our 2020 Stock and Incentive Compensation Plan, as partial compensation for Mr. Mosser’s services as Chief Executive Officer and President. The option shares are exercisable at a price of $12.41 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 August 1, 2023, we granted stock option awards to Thomas Metzler, our Chief Financial Officer, Treasurer and Secretary to acquire up to 12,091 shares of Common Stock under our 2020 Stock and Incentive Compensation Plan, as partial compensation for Mr. Metzler’s services as Chief Financial Officer, Treasurer, and Secretary. The option shares are exercisable at a price of $12.41 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 August 22, 2023, we granted stock option awards to Stephen Sheriff, our Chief Operating Officer to acquire up to 7,524 shares of Common Stock under our 2020 Stock and Incentive Compensation Plan, as partial compensation for Mr. Sheriff’s services as Chief Operating Officer. The option shares are exercisable at a price of $10.08 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.
Nirajkumar Patel
During the fiscal year ended October 31, 2023, we paid a base salary of approximately $276,000 to Nirajkumar Patel, our Chief Science & Regulatory Officer , compared to a base salary of approximately $244,000 for the fiscal year ended October 31, 2022. In May 2020, our Board approved a cash bonus award to Mr. Patel equal to $30,000 for every $25 million in gross revenues generated by us. On the same date, our Board also approved an equity bonus award to Mr. Patel of 3,572 restricted shares of our Common Stock for every $50 million in accumulated gross revenues generated by us. Based on the cash bonus award, we paid Mr. Patel a cash bonus of $30,000 in fiscal year 2022 based on our meeting the gross revenue benchmarks that year and $0 in fiscal year 2023 .
We issued the following stock compensation to Mr. Patel during fiscal years 2023 and 2022:
| Vesting and/or Issuance Date | Number of Shares of our Common Stock | Price Per Share | Aggregate Value | |||||||||
| 11/5/2021 | 751 | $ | 37.80 | $ | 28,368 | |||||||
| 2/5/2022 | 698 | $ | 20.37 | $ | 14,216 | |||||||
During fiscal year 2022, we paid approximately $57,709 in non-equity incentive plan compensation, which consisted of cash paid in lieu of a vested RSU issuance. The aggregate values are based on the value of the vesting date for the shares that would have been issued.
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Eric Mosser
During the fiscal year ended October 31, 2023, we paid a base salary of approximately $300,000 to Eric Mosser, our former Chief Executive Officer and President who resigned such positions on December 21, 2023, compared to $226,577 for the fiscal year ended October 31, 2022. In May 2020, our Board approved a cash bonus award to Mr. Mosser equal to $20,000 for every $25 million in gross revenues generated by us. On the same date, our Board also approved an equity bonus award to Mr. Mosser of 298 restricted shares of our Common Stock for every $50 million in accumulated gross revenues generated by us. Based on the cash bonus award, we paid Mr. Mosser a cash bonus of $20,000 in fiscal year 2022 based on our meeting the gross revenue benchmarks that year and $0 in fiscal year 2023.
We issued the following stock compensation to Mr. Mosser during fiscal years 2023 and 2022:
| Vesting and/or Issuance Date | Number of Shares of our Common Stock | Price Per Share | Aggregate Value | |||||||||
| 11/5/2021 | 671 | $ | 37.80 | $ | 25,330 | |||||||
| 2/5/2022 | 608 | $ | 20.37 | $ | 12,377 | |||||||
During fiscal year 2022 we paid approximately $57,709 in non-equity incentive plan compensation, which consisted of cash paid in lieu of a vested RSU issuance. The aggregate value is based on the value on the vesting date for the shares that would have been issued.
Mark Thoenes
Effective June 30, 2021, we entered into a Consulting Agreement, dated June 14, 2021, with Mr. Thoenes (the “Consulting Agreement”), Pursuant to the Consulting Agreement, we agreed to pay Mr. Thoenes a rate of $130 per hour and will reimburse him for usual and customary business expenses. We paid approximately $347,671 and $298,050 to Mr. Thoenes pursuant to the Consulting Agreement during the fiscal years 2022 and 2023 respectively. The total fair market value of these stock options on March 3, 2023 was $30,650. The Consulting Agreement was for a term of approximately 6 months, or until December 31, 2021, and was extended by the parties to July 31, 2023. Mr. Thoenes was assisting us as Interim Chief Financial Officer. He resigned this position on August 1, 2023.
Outstanding Equity Awards at Fiscal Year-End October 31, 2023
| Stock Option Awards | ||||||||
| Name | Number of Stock Options that Have Not Vested (#) | Market Value of Stock Options that Have Not Vested ($) | ||||||
| Nirajkumar Patel | 11,905 | 182,504 | ||||||
| Eric Mosser (resigned in December 2023) | 38,909 | 517,650 | ||||||
| Thomas Metzler | 12,092 | 150,064 | ||||||
| Stephen Sheriff | 8,715 | 94,100 | ||||||
Potential Payments Upon Termination or Change-of-Control
Other than the stock options mentioned above in “Outstanding Equity Awards at Fiscal Year-End”, none of our named executive officers are entitled to any payments upon termination or change-of-control.
Retirement or Similar Benefit Plans
There are no arrangements or plans in which we provide retirement or similar benefits for our named executive officers.
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Employment Agreements
Eric Mosser. On August 1, 2023, we entered an employment agreement with Mr. Mosser. Pursuant to the terms of the agreement, Mr. Mosser was paid an annual salary of $300,000 and receives health care insurance and other customary benefits. There was no fixed period outlined in the agreement, rather Mr. Mosser’s employment was at will, meaning that either party may terminate the employment at any time for any reason or no reason. In addition to Mr. Mosser’s base salary, Mr. Mosser was entitled to bonuses at the discretion of the Compensation Committee of our Board. Mr. Mosser resigned his positions with our company in December 2023.
Thomas Metzler. On August 1, 2023, we entered an employment agreement with Mr. Metzler pursuant to which he serves as our Chief Financial Officer. Pursuant to the terms of the agreement, Mr. Metzler is paid an annual salary of $240,000 and receives health care insurance and other customary benefits. In addition to Mr. Metzler’s base salary, Mr. Metzler is entitled to bonuses at the discretion of the Compensation Committee of our Board, up to 30% of his base salary. Pursuant to his employment agreement, we granted to Mr. Metzler, effective August 1, 2023, an option to purchase 12,092 shares of the Common Stock with an exercise price of $12,41 per share. Such option vests over four years, with one-quarter vesting on the first anniversary of the grant date and the remainder monthly at the rate of 1/36 per month until fully vested. Mr. Metzler’s employment agreement contains customary clawback language, which states that any incentive-based compensation granted to Mr. Metzler, including any annual incentive bonus and stock options, that is subject to recovery under any law, government rule or regulation, or stock exchange listing requirement, will be subject to such deductions and clawback as may be required pursuant to applicable rules and our company’s Compensation Clawback Policy. The agreement also contains customary provisions for confidentiality and matters related to intellectual property and company property.
Mr. Metzler’s employment is at will, meaning that either he or our company may terminate the employment at any time for any reason or no reason. The employment agreement also allows for termination by us for “Cause” or by Mr. Metzler without “Good Reason,” as defined in the agreement. If we terminate Mr. Metzler’s employment for Cause, or if he terminates without Good Reason, Mr. Metzler will be entitled to receive the following: (i) any unpaid base salary accrued up to the termination date, (ii) reimbursement for business expenses, and (iii) employee benefits and equity compensation under our benefit plans as of the termination date, without any additional severance or termination payments. If we terminate Mr. Metzler without Cause, or if he terminates for Good Reason, Mr. Metzler will be entitled to receive: (i) the previously mentioned accrued amounts, (ii) severance pay equal to two (2) months of his base salary, increasing to six (6) months after one (1) year of employment, and (iii) any rights to option or equity grants previously granted.
Stephen Sherrif. On August 22, 2023, we entered an employment agreement with Mr. Sheriff pursuant to which he serves as of Chief Operating Officer. Pursuant to the terms of the agreement, Mr. Sheriff is paid an annual salary of $225,000 and receives health care insurance and other customary benefits. In addition to Mr. Sherrif’s base salary, Mr. Sheriff is entitled to bonuses at the discretion of the Compensation Committee of our Board, up to 30% of his base salary. Pursuant to his employment agreement, we granted to Mr. Sheriff, effective August 22, 2023, an option to purchase 7,524 shares of the Common Stock with an exercise price of $9.24 per share. Such option vests over four years, with one-quarter vesting on the first anniversary of the grant date and the remainder monthly at the rate of 1/36 per month until fully vested. Mr. Sheriff’s employment agreement contains customary clawback language, which states that any incentive-based compensation granted to Mr. Metzler, including any annual incentive bonus and stock options, that is subject to recovery under any law, government rule or regulation, or stock exchange listing requirement, will be subject to such deductions and clawback as may be required pursuant to applicable rules and our company’s Compensation Clawback Policy. The agreement also contains customary provisions for confidentiality and matters related to intellectual property and company property.
Mr. Sheriff’s employment is at will, meaning that either he or our company may terminate the employment at any time for any reason or no reason. The employment agreement also allows for termination by us for “Cause” or by Mr. Sheriff without “Good Reason,” as defined in the agreement. If we terminate Mr. Sheriff’s employment for Cause, or if he terminates without Good Reason, Mr. Sheriff will be entitled to receive the following: (i) any unpaid base salary accrued up to the termination date, (ii) reimbursement for business expenses, and (iii) employee benefits and equity compensation under our benefit plans as of the termination date, without any additional severance or termination payments. If we terminate Mr. Sheriff without Cause, or if he terminates for Good Reason, Mr. Sheriff will be entitled to receive: (i) the previously mentioned accrued amounts, (ii) severance pay equal to two (2) months of his base salary, increasing to six (6) months after one (1) year of employment, and (iii) any rights to option or equity grants previously granted.
Barry M. Hopkins. On February 8, 2024, we entered an employment agreement with Barry M. Hopkins under which he serves as our Executive Chairman. Pursuant to the terms of the agreement, Mr. Hopkins is paid an annual salary of $300,000 and receives health care insurance and other customary benefits. In addition to Mr. Hopkins’ base salary, Mr. Hopkins is entitled to bonuses at the discretion of the Compensation Committee of our Board, up to 40% of his base salary. Pursuant to his employment agreement, we granted to Mr. Hopkins, effective February 8, 2024, an option to purchase 63,881 shares of the Common Stock with an exercise price of $5.25 per share (which was the fair market value of the Common Stock when he was appointed as our Executive Chairman on November 9, 2023). Such option vests over four years, with one-quarter vesting on the first anniversary of the grant date and the remainder monthly at the rate of 1/36 per month until fully vested. Mr. Hopkins’ employment agreement contains customary clawback language, which states that any incentive-based compensation granted to Mr. Hopkins, including any annual incentive bonus and stock options, that is subject to recovery under any law, government rule or regulation, or stock exchange listing requirement, will be subject to such deductions and clawback as may be required pursuant to applicable rules and our company’s Compensation Clawback Policy. The agreement also contains customary provisions for confidentiality and matters related to intellectual property and company property.
Mr. Hopkins’ employment is at will, meaning that either he or our company may terminate the employment at any time for any reason or no reason. The employment agreement also allows for termination by us for “Cause” or by Mr. Hopkins without “Good Reason,” as defined in the agreement. If we terminate Mr. Hopkins’ employment for Cause, or if he terminates without Good Reason, Mr. Hopkins will be entitled to receive the following: (i) any unpaid base salary accrued up to the termination date, (ii) reimbursement for business expenses, and (iii) employee benefits and equity compensation under our benefit plans as of the termination date, without any additional severance or termination payments. If we terminate Mr. Hopkins without Cause, or if he terminates for Good Reason, Mr. Hopkins will be entitled to receive: (i) the previously mentioned accrued amounts, (ii) severance pay equal to two (2) months of his base salary, increasing to six (6) months after one (1) year of employment, and (iii) any rights to option or equity grants previously granted.
Nirajkumar Patel. We do not have formal written employment agreements with Mr. Patel.
Director Compensation
In fiscal year 2023, we compensated our independent directors as follows:
Name of Director (1) |
Fees
Earned or Paid in Cash |
Option Awards |
Total | |||||||||
| Paul Reuter (2) | $ | 100,000 | $ | 91,249 | $ | 191,249 | ||||||
| Roger Brooks | 87,500 | 91,249 | 178,749 | |||||||||
| George Chuang | 87,500 | 91,249 | 178,749 | |||||||||
| Barry M. Hopkins (3) | 37,500 | 108,749 | 146,249 | |||||||||
| David Worner | 37,500 | 108,749 | 146,249 | |||||||||
| James P. Cassidy (4) | 16,667 | 0 | 16,667 | |||||||||
| (1) | Mr. Patel is a named executive officer and, accordingly, his compensation is included in the “Summary Compensation Table” above. Mr. Patel did not receive any compensation for their service as a director for the fiscal year ended October 31, 2023. |
| (2) | Mr. Reuter resigned from the Board on March 18, 2023. |
| (3) | Mr. Hopkins was appointed as our Executive Chairman and principal executive officer in November 2023. |
| (4) | Mr. Cassidy resigned from the Board on January 25, 2024. |
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table sets forth information with respect to compensation plans under which our equity securities are authorized for issuance as of the end of fiscal year 2023:
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| Plan category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted average exercise and grant price of outstanding options, warrants and rights | Number of securities remaining available for future issuance | |||||||||
| Equity compensation plans approved by security holders | 0 | 0 | 0 | |||||||||
| Equity compensation plans not approved by security holders | 2,044 | $ | 377.58 | 6,713,749 | ||||||||
Plans Not Approved by Stockholders
On May 28, 2020, our Board adopted the Incentive Plan. The following is a summary of the principal features of the Incentive Plan. The summary of the Incentive Plan does not purport to be complete and is qualified in its entirety by reference to the full text of the Incentive Plan.
Background. The purpose of the Incentive Plan is to enhance stockholder value by linking the compensation of our employees, officers, directors, and consultants to increases in the price of our Common Stock and the achievement of other performance objectives and to encourage ownership in the Company by key personnel whose long-term employment is considered essential to our continued progress and success. The Incentive Plan is also intended to assist us in recruiting new employees and to motivate, retain, and encourage such employees and directors to act in stockholders’ interest and share in our success. The various types of incentive awards that may be provided under the Incentive Plan are intended to enable us to respond to changes in compensation practices, tax laws, accounting regulations, and the size and diversity of its business. We will not offer incentive stock options under the Incentive Plan. All our employees, officers, directors, and consultants will be eligible to be granted awards under the Incentive Plan.
The Incentive Plan will be administered by our Board. All awards made under the Incentive Plan will be subject to the recommendations and approvals of our Board.
Stock Subject to the Incentive Plan. Subject to the terms of the Incentive Plan, the maximum aggregate number of shares of our Common Stock that may be subject to or delivered under awards granted pursuant to the Incentive Plan is 4,761,905 shares. Shares subject to awards that have been canceled, expired, settled in cash, or not issued or forfeited for any reason (in whole or in part) will not reduce the aggregate number of shares that may be subject to or delivered under awards granted under the Incentive Plan and be available for future awards granted under the Incentive Plan.
Eligibility. We may grant awards under the Incentive Plan to employees, officers, directors, and consultants.
Types of Awards. The Incentive Plan provides for options not qualifying as “incentive” stock options, as defined in Section 422 of the Internal Revenue Code of 1986, as amended, stock appreciation rights, shares of restricted stock, and other stock-based awards.
Award Limitation. Non-employee directors may not be granted awards in excess of the 200,000 shares of our Common Stock in any calendar year.
Term and Amendments. Unless terminated by our Board, the Incentive Plan will continue to remain effective until no further awards may be granted, and all awards granted under the Incentive Plan are no longer outstanding. Our Board may at any time, and from time to time, amend the Incentive Plan; provided that no amendment will be made that would impair the rights of a holder under any agreement entered into pursuant to the Incentive Plan without the holder’s consent.
Security Ownership of Certain Beneficial Owners and Management
Common Stock
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The following table sets forth, as of the date of this Report, the number of shares of Common Stock owned of record and beneficially by (i) each of our current directors, (ii) each of our named executive officers, (iii) our directors and executive officers as a group, and (iv) each stockholder known by us to be the beneficial owner of more than 5% of our outstanding Common Stock. Beneficial ownership has been determined in accordance with the rules and regulations of the SEC and includes voting or investment power with respect to shares. Unless otherwise indicated, the persons named in the table have sole voting and investment power with respect to the number of shares indicated as beneficial owned by them.
| Name and Address (1) | Amount and Nature of Beneficial Ownership (Common Stock) (2) | Percentage of Class (2) | ||||||
| Nirajkumar Patel (3) | 1,976,248 | 69.43 | % | |||||
| Stephen Sheriff (4) | 7,596 | * | ||||||
| Roger Brooks (5) | 6,746 | * | ||||||
| George Chuang (6) | 6,746 | * | ||||||
| Barry M. Hopkins (7) | 0 | * | ||||||
| David Worner (8) | 0 | * | ||||||
| Mark Thoenes (9) | 9,604 | * | ||||||
| Thomas Metzler (10) | 0 | * | ||||||
| Current Executive Officers and Directors as a Group (8 Persons) | 2,006,940 | 70.51 | % | |||||
| Kaival Holdings, LLC, 401 N. Wickham Road, Suite 130 Melbourne, FL 32935 (12) | 1,917,400 | 67.36 | % | |||||
* Less than 1.0%
(1) The address for each person listed above is 4460 Old Dixie Highway, Grant-Valkaria, Florida 32949, unless otherwise indicated.
(2) Applicable percentage of ownership is based on 2,846,335 shares of Common Stock outstanding as of the date of this Report. Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. Shares of Common Stock that are currently exercisable within 60 days as of the date of this Report are deemed to be beneficially owned by the person holding such securities for the purpose of computing the percentage of ownership of such person but are not treated as outstanding for the purpose of computing the percentage ownership of any person.
(3) Nirajkumar Patel serves as our Chief Science & Regulatory Officer, and director. Consists of 1,917,400 shares of our Common Stock held by Kaival Holdings, an entity over which Mr. Patel has shared dispositive and voting authority, and approximately 52,381 shares of our Common Stock issuable upon the exercise of vested options, and excludes approximately 11,905 shares of our Common Stock issuable upon the exercise of unvested options.
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(4) Stephen Sheriff serves as our Chief Operating Officer. Consists of 6,405 shares of our Common Stock and approximately 1,191 shares of our Common Stock issuable upon the exercise of vested options, and excludes approximately 8,715 shares of our Common Stock issuable upon the exercise of unvested options.
(5) Roger Brooks serves as a member of our board. Consists of approximately 6,746 shares of our Common Stock issuable upon the exercise of vested options and excludes approximately 5,953 shares of our Common Stock issuable upon the exercise of unvested options.
(6) George Chuang serves as a member of our board. Consists of approximately 6,746 shares of our Common Stock issuable upon the exercise of vested options and excludes approximately 5,953 shares of our Common Stock issuable upon the exercise of unvested options.
(7) Barry M. Hopkins serves as our Executive Chairman and Interim Chief Executive Officer and President. Excludes approximately 5,953 shares of our Common Stock issuable upon the exercise of unvested options.
(8) David Worner serves as a member of our board. Excludes approximately 5,953 shares of our Common Stock issuable upon the exercise of unvested options.
(9) Mark Thoenes serves as a member of our board. Consists of 80 shares of our Common Stock and approximately 9,524 shares of our Common Stock issuable upon the exercise of vested options.
(10) Thomas Metzler serves as our Chief Financial Officer, Secretary and Treasurer. Excludes approximately 12,092 shares of our Common Stock issuable upon the exercise of unvested options.
Nirajkumar Patel and Eric Mosser (our former Chief Executive Officer and President) are the sole voting members of Kaival Holdings, with Mr. Patel holding voting control.
Item 13. Certain Relationships and Related Party Transactions
Since the beginning of our fiscal year, we have entered into or participated in the following transactions with related persons:
Revenue
During the year ended October 31, 2023, the Company recognized revenue of $10,828 from three companies owned by Nirajkumar Patel, the Chief Science and Regulatory Officer and a director of the Company, and/or his wife.
Purchases and Accounts Payable
During the year ended October 31, 2023, 100% of the inventories of products, consisting solely of the BIDI® Stick, were purchased from Bidi, a related party controlled by Nirajkumar Patel, in the amount of $ 12,747,006. As of October 31, 2023, the Company product valued at $4,057,025 were held in inventory. In addition, as of October 31, 2023, the Company had an accounts payable balance to Bidi related to purchase of inventories of $1,521,491.
The KBI License Agreement provides that KBI shall pay Bidi license fees equivalent to 50% of the adjusted earned royalty payments, after any offsets due to jointly agreed costs such development costs incurred for entry to specific international markets. During the year ended October 31, 2023, the Company paid license fees of approximately $150,000 to Bidi. As of October 31, 2023 and 2022, no additional license fees are owed to Bidi. As of October 31, 2023, the Company had accounts payable to Bidi of $712,524 for NRE and $240,802 for reimbursement of insurance expense.
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Leased Office Space and Storage Space
We capitalize 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. We exclude short-term leases having initial terms of 12 months or less from Topic 842 as an accounting policy election and recognizes rent expense on a straight-line basis over the lease term. On June 10, 2022, we entered into the 2022 Lease with Just Pick for approximately 21,332 rentable square feet combined in our principal office building and warehouse, together with all improvements thereon. Just Pick is considered a related party because our Chief Science and Regulatory Officer and director, Mr. Nirajkumar Patel, owns and controls Just Pick.
Receivables Purchase Arrangements
On November 29, 2023, we entered into two receivables purchase transactions pursuant to: (i) a Future Receivables Sale and Purchase Agreement, dated November 29, 2023, between Clearview Funding Solutions LLC (“Clearview”) and our company (the “Clearview Agreement”), and (ii) a Future Receivables Sale and Purchase Agreement, dated November 29, 2023, between Mr. Advance LLC (“Advance”) and our company (the “Advance Agreement”).
Pursuant to the Clearview Agreement, we sold future receivables in the principal amount of $864,000 (the “Clearview Future Receivables”) to Clearview in a private transaction for a purchase price of $600,000 (giving effect to original issue discount of $264,000). In connection with the sale of the Clearview Future Receivables, we also paid an origination fee to Clearview for underwriting and application costs of $36,520, resulting in net proceeds to us of $563,480 (gross of advisory fees). Our obligations under the Clearview Agreement are personally guaranteed by Eric Mosser, our former Chief Executive Officer and President.
Pursuant to the Advance Agreement, we sold future receivables in the principal amount of $864,000 (the “Advance Future Receivables”) to Advance in a private transaction for a purchase price of $600,000 (giving effect to original issue discount of $264,000). In connection with the sale of the Advance Future Receivables, we also paid an origination fee to Advance for underwriting and related expenses of $36,035, resulting in net proceeds to us of $563,965 (gross of advisory fees). Our obligations under the Advance Agreement are also personally guaranteed by Mr. Mosser.
Policies and Procedures for Related Party Transactions
We follow ASC 850, Related Party Disclosures, for the identification of related parties and disclosure of related party transactions. When and if we contemplate entering into a transaction in which any executive officer, director, nominee, or any family member of the foregoing would have a direct or indirect interest, regardless of the amount involved, the terms of such transaction are presented to our board of directors (other than any interested director, if possible) for approval and documented in the board minutes.
Item 14. Principal Accounting Fees and Services.
Below is the aggregate amount of fees billed for professional services rendered by MaloneBailey, LLP, our principal accountants with respect to our fiscal year ended October 31, 2023, and October 31, 2022.
| 2023 | 2022 | |||||||
| Audit and review fees | $ | 286,725 | $ | 195,000 | ||||
| Audit-related fees | — | 10,000 | ||||||
| Tax fees | — | — | ||||||
| All other fees | — | — | ||||||
| Total | $ | 286,725 | $ | 205,000 | ||||
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Pre-Approval Policies and Procedures
All audit fees are approved by the Audit Committee of our Board. The Audit Committee reviews, and in its sole discretion, pre-approves, our independent auditors’ annual engagement letter, including proposed fess and all audit and non-audit services provided by the independent auditors. Accordingly, all services described under “Audit Fees,” “Audit-related Fees,” “All Other Fees,” and “Tax Fees,” as applicable, were pre-approved by our Audit Committee. The Audit Committee may not engage independent auditors to perform the non-audit services prohibited by law or regulations.
PART IV
Item 15. Exhibits, Financial Statement Schedules.
a) Financial Statements
1. Our financial statements are listed in the index under Item 8 of this document; and
2. All financial statement schedules are omitted because they are not applicable, not material or the required information is shown in the financial statements or notes thereto.
(b) Exhibits required by Item 601 of Regulation S-K.
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59
60
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| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document* |
| 101.PRE | XBRL Taxonomy Presentation Linkbase Document* |
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)* |
*Filed herewith.
+ + Certain portions of this exhibit (indicated by “[***]”) have been omitted pursuant to Regulation S-K, Item 601(b)(10).as the Company has determined they are both not material and are of the type that the Company treats as private or confidential.
| (1) | Schedules and Exhibits omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company agrees to furnish supplementally a copy of any omitted schedule to the Securities and Exchange Commission upon request; provided, however, that the Company may request confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended, for any Schedule or Exhibit so furnished. |
Item 16. Form 10-K Summary.
None.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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. | ||
| By: | /s/ Barry M. Hopkins | |
| Barry M. Hopkins | ||
| Executive Chairman, Interim Chief Executive, and President | ||
| (Principal Executive Officer) | ||
| Dated: February 13, 2024 | ||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| By: | /s/ Barry M. Hopkins | |
| Barry M. Hopkins | ||
| Executive Chairman, Interim Chief Executive Officer, and President | ||
| (Principal Executive Officer) | ||
| Dated: February 13, 2024 | ||
| By: | /s/ Thomas Metzler | |
| Thomas Metzler | ||
| Chief Financial Officer, Treasurer, and Secretary | ||
| Dated: February 13, 2024 | ||
| By: | /s/ Nirajkumar Patel | |
| Nirajkumar Patel | ||
| Chief Science and Regulatory Officer and Director | ||
| Dated: February 13, 2024 | ||
| By: | /s/ Roger Brooks | |
| Roger Brooks | ||
| Director | ||
| Dated: February 13, 2024 | ||
| By: | /s/ George Chuang | |
| George Chuang | ||
| Director | ||
| Dated: February 13, 2024 | ||
| By: | /s/ Mark Thoenes | |
| Mark Thoenes | ||
| Director | ||
| Dated: February 13, 2024 | ||
| By: | /s/ David Worner | |
| David Worner | ||
| Director | ||
| Dated: February 13, 2024 | ||
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Exhibit 4.1
DESCRIPTION OF THE REGISTRANT’S SECURITIES REGISTERED PURSUANT TO SECTION 12 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
The following is a summary of all material characteristics of the capital stock of Kaival Brands Innovations Group, Inc., a Delaware corporation (“Kaival Brands,” the “Company,” “we,” “us,” or “our”), as set forth in our Amended and Restated Certificate of Incorporation, as amended (the “Certificate of Incorporation”) and our Bylaws (the “Bylaws”), and as registered under Section 12 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The summary does not purport to be complete and is qualified in its entirety by reference to our Certificate of Incorporation and our Bylaws, each of which are incorporated by reference as exhibits to the Annual Report on Form 10-K of which this Exhibit 4.1 is a part and to the provisions of the Delaware General Corporate Law (the “DGCL”). We encourage you to review complete copies of our Certificate of Incorporation and our Bylaws, and the applicable provisions of the DGCL for additional information.
General
Our authorized capital stock consists of 1,005,000,000 shares, divided into 1,000,000,000 shares of common stock, par value $0.001 per share (the “Common Stock”), and 5,000,000 shares of preferred stock, par value $0.001 per share (“Preferred Stock”). Under our Certificate of Incorporation, our board of directors (our “Board”) has the authority to issue such shares of Common Stock and Preferred Stock in one or more classes or series, with such voting powers, designations, preferences and relative, participating, optional or other special rights, if any, and such qualifications, limitations or restrictions thereof, if any, as shall be provided for in a resolution or resolutions adopted by our Board and filed as designations.
Common Stock
As of February 13, 2024, 2,846,335 shares of our Common Stock were outstanding.
Holders of our Common Stock are entitled to one vote for each share held of record on all matters submitted to a vote of stockholders, including the election of directors, and are entitled to receive dividends when and as declared by our Board out of funds legally available therefore for distribution to stockholders and to share ratably in the assets legally available for distribution to stockholders in the event of the liquidation or dissolution, whether voluntary or involuntary, of the Company. We have not paid any dividends and do not anticipate paying any dividends on our Common Stock in the foreseeable future. It is our present policy to retain earnings, if any, for use in the development of our business. Our Common Stockholders do not have cumulative voting rights in the election of directors and have no preemptive, subscription, or conversion rights. Our Common Stock is not subject to redemption by us.
The transfer agent and registrar for our Common Stock is VStock Transfer, LLC
Certain Provisions of our Certificate of Incorporation, our Bylaws, and the DGCL
Certain provisions in our Certificate of Incorporation and Bylaws, as well as certain provisions of the DGCL, may be deemed to have an anti-takeover effect and may delay, deter, or prevent a tender offer or takeover attempt that a stockholder might consider to be in its best interests, including attempts that might result in a premium being paid over the market price of the shares held by stockholders. These provisions contained in our Certificate of Incorporation and Bylaws include the items described below.
| ● | Special Meetings of Stockholders. Our Bylaws provide that special meetings of our stockholders may be called only by a majority of our Board, the President, Chief Executive Officer, or the Secretary. | |
| ● | No Cumulative Voting. Our Certificate of Incorporation does not include a provision for cumulative voting for directors. Under cumulative voting, a minority stockholder holding a sufficient percentage of a class of shares could be able to ensure the election of one or more directors. | |
| ● | Undesignated Preferred Stock. Because our Board has the power to establish the preferences and rights of the shares of any additional series of Preferred Stock, it may afford holders of any Preferred Stock preferences, powers, and rights, including voting and dividend rights, senior to the rights of holders of our Common Stock, which could adversely affect the holders of Common Stock and could discourage a takeover of us even if a change of control of the Company would be beneficial to the interests of our stockholders. | |
| ● | Our Officers Beneficially Own a Majority of Our Capital Stock. Our executive officers and sole directors beneficially own more than a majority of our Common Stock and own all of the issued and outstanding shares of Series A Preferred Stock. Accordingly, they are able to control all matters related to the Company. |
These and other provisions contained in our Certificate of Incorporation and Bylaws are expected to discourage coercive takeover practices and inadequate takeover bids. These provisions are also designed to encourage persons seeking to acquire control of us to first negotiate with our Board. However, these provisions could delay or discourage transactions involving an actual or potential change in control of us, including transactions in which stockholders might otherwise receive a premium for their shares over then current prices. Such provisions could also limit the ability of stockholders to remove current management or approve transactions that stockholders may deem to be in their best interests.
In addition, we are subject to the provisions of Section 203 of the DGCL. Section 203 of the DGCL prohibits a publicly-held Delaware corporation from engaging in a “business combination” with an “interested stockholder” for a period of three years after the person became an interested stockholder, unless:
| ● | The board of directors of the corporation approved the business combination or other transaction in which the person became an interested stockholder prior to the date of the business combination or other transaction; | |
| ● | Upon consummation of the transaction that resulted in the person becoming an interested stockholder, the person owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the number of shares outstanding, shares owned by persons who are directors and also officers of the corporation and shares issued under which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or | |
| ● | on or subsequent to the date the person became an interested stockholder, the board of directors of the corporation approved the business combination and the stockholders of the corporation authorized the business combination at an annual or special meeting of stockholders by the affirmative vote of at least 66-2/3% of the outstanding voting stock of the corporation that is not owned by the interested stockholder. |
A “business combination” includes mergers, asset sales, and other transactions resulting in a financial benefit to the interested stockholder. Subject to certain exceptions, an “interested stockholder” is a person who, together with affiliates and associates, owns, or within the prior three years did own, 15% or more of a corporation’s voting stock.
Section 203 of the DGCL could depress our stock price and delay, discourage, or prohibit transactions not approved in advance by our Board, such as takeover attempts that might otherwise involve the payment to our stockholders of a premium over the market price of our Common Stock.
EXHIBIT 10.29
EXECUTIVE EMPLOYMENT AGREEMENT
THIS EXECUTIVE EMPLOYMENT AGREEMENT (this “Agreement”) is made and entered into by and between Kaival Brands Innovations Group, Inc. (the “Company”) located at 4460 Old Dixie Highway, Grant-Valkaria, Florida 32949, and Mr. Barry Michael Hopkins (“Executive”) (each a “Party” and collectively the “Parties”) executed as of February 8, 2024 but effective as of November 9, 2023 (“Effective Date”).
WHEREAS, as of the Effective Date, the Executive was appointed as the Executive Chairman and principal executive officer of the Company;
WHEREAS, the Company now wishes to employ Executive on and subject to the terms set forth in this Agreement; and
WHEREAS, Executive wishes to continue his employment with the Company on the terms set forth herein;
NOW, THEREFORE, in consideration of the mutual promises contained herein and other good and valuable consideration, the receipt and sufficiency of which are acknowledged, the Parties agree as follows:
1. Employment Term/Prior Agreements.
a) Employment Term. Executive’s employment is at will, meaning that either party may terminate the employment at any time for any reason or no reason. Nothing in this Agreement is intended to create a promise or representation of continued employment or employment for a fixed period of time. The period of time between the Effective Date and the termination of the Executive’s employment shall be referred as the “Term.”
b) Prior Agreements. Any existing agreement between Executive and the Company’s Board of Directors (the “Board”) related to Executive’s service as a Board director, shall remain in full force and effect, provided, however, that, other than equity or options already promised to Executive, after the Effective Date, Executive shall not receive any compensation for Board service other than that set forth in this Agreement. Any and all other prior agreements, under which Executive performed work for, or provided services to, the Company, its parent company, or any affiliate, shall terminate, and be of no further force or effect as of the Effective Date. Nothing herein shall, however, be considered a waiver of any vested compensation Executive earned under any prior agreement.
2. Position and Duties.
a) Title. The Company hereby agrees to employ the Executive to serve as Executive Chairman of the Company. It is acknowledged as that as of the date of this Agreement, Executive is also serving as the Company’s Interim Chief Executive Officer and President.
b) Duties. Executive shall report to the Company’s Board of Directors (the “Board”). Executive shall perform all duties and have all powers incident to the office he holds. Executive
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shall have overall responsibility for the Company’s operations, including supervision of all subordinate officers and employees. Executive shall also be required to certify to the United States Securities & Exchange Commission (“SEC”) that the Company’s filings with the SEC fairly present in all material respects the Company’s financial condition. During the Term, the Executive shall be employed by the Company on a full-time basis and shall perform such duties and responsibilities on behalf of the Company and all persons and entities directly or indirectly controlling, controlled by, or under common control with, the Company. Executive shall perform such other duties and may exercise such other powers as may be assigned by the Board from time to time that are consistent with his title and status.
c) Board Service. It is acknowledged that Executive is currently the Chairperson of the Board. The Company may nominate Executive to serve as a Board member. Executive agrees, for no additional compensation beyond that provided for in this Agreement, to serve on the Board and any committees of the Board.
d) Full-Time Commitment/Policies. Throughout the Executive’s employment, the Executive shall devote substantially all of his professional time to the performance of his duties of employment with the Company (except as otherwise provided herein) and shall faithfully and industriously perform such duties. The Executive will be required to comply with all Company policies as may exist and be in effect from time to time.
e) Executive Representations. The Executive represents and warrants to the Company that he is under no obligation or commitments, whether contractual or otherwise, that are inconsistent with his obligations under this Agreement. The Executive represents and warrants that he will not use or disclose, in connection with his employment by the Company, any trade secrets or proprietary information or intellectual property in which any other person or entity has any right, title or interest and that his employment by the Company as contemplated by this Agreement will not infringe or violate the rights of any other person.
3. Compensation and Benefits.
a) Base Salary. In consideration for his work under the terms of this Agreement, the Executive shall earn a base salary in the gross amount of $300,000 (Three Hundred Thousand Dollars) per year (“Base Salary”). Executive’s Base Salary shall be paid in equal semi-monthly installments, in accordance with the regular payroll practices of the Company.
b) Annual Bonus. Executive shall be eligible for an annual incentive bonus based upon targets set by the Board of Directors and its Compensation Committee in their sole and absolute discretion in an executive bonus plan, by January 30, 2024, and January 30 of each succeeding year. Executive’s bonus target shall be up to 40% (forty percent) of Executive’s Base Salary.
c) Option Grants. As of the date of this Agreement, the Company shall grant Executive an option, valued by the Company’s Black-Scholes analysis at $335,000.00 (Three Hundred Thirty-Five Thousand Dollars) to purchase common shares of the Company (the “Option”). The Option shall vest over four years beginning on the Effective Date. One-quarter of the Option shall vest on the first anniversary of the Effective Date and afterward shall vest monthly at the rate of 1/36 per month until fully vested. The Option and its vesting shall be
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subject to, and governed by, the terms and conditions of the Company’s 2020 Stock and Incentive Compensation Plan as amended from time to time (the “Incentive Plan”), and the award agreement issued by the Incentive Plan.
d) Clawback Rules. Notwithstanding any other provisions in this Agreement to the contrary, any incentive-based compensation, including any annual incentive bonus and the Option, paid to the Executive under this Agreement, the Incentive Plan, or any other agreement or arrangement with the Company, which is subject to recovery under any law, government rule or regulation, or stock exchange listing requirement (“Clawback Rules”), will be subject to such deductions and clawback as may be required to be made pursuant to such Clawback Rules or any policy adopted by the Company pursuant to any such Clawback Rules. The Company shall decide, in its sole and absolute discretion, what policies it must adopt in order to comply with such Clawback Rules.
e) Benefits and Perquisites. Executive shall be eligible for any fringe benefits offered by the Company on the same terms and conditions as other executives. Such benefits may include group health benefits and a 401k retirement plan. The Company reserves the right, in its sole discretion, to amend or terminate any employee benefit plan in accordance with applicable law.
f) Paid Time Off. Executive will be entitled to 20 (twenty) paid vacation days per calendar year, pro-rated for partial years. Vacation days shall accrue at the rate of 1/24 per pay period. Executive shall be entitled to an additional vacation day each succeeding year up to a maximum accrual rate of 30 vacation days per year. The maximum vacation accrual shall be 1.75 times Executive’s annual vacation allotment, at which point Executive shall not accrue any additional vacation days until Executive’s accrual balance is reduced below that amount. Executive shall also be entitled to five paid sick days and those paid holidays recognized by the Company. All paid time off shall be governed by the Company’s policies which the Company may, in its sole and absolute discretion, change from time to time.
g) Taxes-Withholdings. All compensation paid or provided under this Agreement shall be subject to such deductions and withholdings for taxes and such other amounts as are required by law or elected by the Executive.
4. Business Expenses. The Company will reimburse or advance all reasonable business expenses that Executive incurs in connection with the performance of his duties under this Agreement, including travel expenses, in accordance with the Company’s policies as established from time to time.
5. Termination of Employment. The Executive’s employment hereunder may be terminated by either the Company or the Executive at any time and for any reason. On termination of the Executive’s employment, the Executive shall be entitled to the compensation and benefits described in this Section 5 and shall have no further rights to any compensation or any other benefits from the Company or any of its affiliates.
a) For Cause, or Without Good Reason. The Executive’s employment hereunder may be terminated by the Company for Cause, or by the Executive without Good Reason. If the
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Executive’s employment is terminated by the Company for Cause, or by the Executive without Good Reason, the Executive shall be entitled to receive:
(i) any accrued but unpaid Base Salary which shall be paid on the pay date immediately following the Termination Date (as defined below) in accordance with the Company’s customary payroll procedures;
(ii) reimbursement for unreimbursed business expenses properly incurred by the Executive, which shall be subject to and paid in accordance with the Company’s expense reimbursement policy; and
(iii) such employee benefits (including equity compensation), if any, to which the Executive may be entitled under the Company’s employee benefit plans as of the Termination Date; provided that, in no event shall the Executive be entitled to any payments in the nature of severance or termination payments except as specifically provided herein.
(iv) such employee benefits (including equity compensation), if any, to which the Executive may be entitled under the Company’s employee benefit plans as of the Termination Date; provided that, in no event shall the Executive be entitled to any payments in the nature of severance or termination payments except as specifically provided herein.
Items 5.1(a)(i) through 5.1(a)(iv) are referred to herein collectively as the “Accrued Amounts.”
b) Cause. For purposes of this Agreement, but not for purposes of the Incentive Plan, “Cause” shall mean the Executive:
i) intentionally or negligently fails to perform his duties under this Agreement;
ii) refuses to comply with a lawful order of the Board;
iii) materially breaches a material term of this Agreement;
iv) willfully and materially violates a written Company policy;
v) is indicted for, convicted of, or pleads guilty or no contest to, a felony or crime involving moral turpitude;
vi) engages in conduct that constitutes gross negligence or willful misconduct in carrying out his duties;
vii) materially violates a federal or state law that the Board reasonably determines has had, or is reasonably likely to have, a material detrimental effect on the Company’s reputation or business; or
viii) commits an act of fraud or dishonesty in the performance of his job duties;
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provided, however, that in the case of (i) - (iv), if curable, the Executive shall have fifteen
(15) days from the delivery of written notice by the Company within which to cure any acts or omissions constituting Cause.
c) Good Reason. For purposes of this Agreement, “Good Reason” shall mean the occurrence of any of the following, in each case during the Term without the Executive’s written consent:
i) a reduction in the Executive’s Base Salary, other than a general reduction in Base Salary of no more than ten percent (10%) that affects all similarly situated executives in substantially the same proportions;
ii) a relocation of the Executive’s principal place of employment by more than 50 (fifty) miles;
iii) any material breach by the Company of any material provision of this Agreement, including failure to provide any material payment or benefit required to be provided to Executive under this Agreement;
iv) a material, adverse change in the Executive’s authority, duties, or responsibilities (other than: (x) failure to re-nominate Executive as a member of the Board or the Board’s appointment of a full time Chief Executive Officer and/or President of the Company; (y) temporarily while the Executive is physically or mentally incapacitated or; (z) as required by applicable law);
Executive cannot terminate employment for Good Reason unless Executive has provided written notice to the Company of the existence of the circumstances providing grounds for termination for Good Reason within thirty (30) days after the initial existence of such grounds and the Company has had thirty (30) days from the date on which such notice is provided to cure such circumstances. If Executive does not terminate his employment for Good Reason within sixty-five (65) days after Executive learns of the first occurrence of the applicable grounds, then Executive will be deemed to have waived the right to terminate for Good Reason with respect to such grounds.
d) Termination Without Cause or Resignation for Good Reason. If Executive’s employment is terminated by the Company without Cause, or by the Executive for Good Reason, the Executive shall be entitled to receive:
i) The Accrued Amounts;
ii) Severance pay in an amount equal to two months of Executive’s then-applicable Base Salary (the “Severance Pay”). On the first anniversary of the Effective Date, Executive’s Severance Pay amount will increase to six months of Executive’s then- applicable Base Salary. The Severance Pay will be paid to Executive in a lump sum within fourteen (14) days after the Release (defined below) becomes effective; and
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iii) Whatever rights with respect to any option or equity grants that are afforded to Executive under the Incentive Plan, including the Incentive Plan’s definition of “Cause” for termination of employment.
e) Release. The Company’s obligation to pay Severance Pay, is expressly conditioned upon Executive’s execution of and delivery to the Company (and non-revocation) of a release (as drafted by the Company at the time of Executive’s termination of employment) which will include an unconditional release of all rights to any claims, charges, complaints, grievances, arising from or relating to Executive’s employment or its termination plus any other potential claims, known or unknown to Executive, against the Company, its affiliates or assigns, or any of their officers, directors, employees and agents, through to the date of Executive’s termination from employment (the “Release”). The Release shall not be mutual but may contain mutual confidentiality and non-disparagement provisions and requirements that certain features of this Agreement remain in effect. The Release shall not require Executive to waive or release any rights to vested or earned compensation of any kind or to waive any rights as a shareholder, option holder, unitholder, or as a participant in the Company’s Incentive Plan.
f) Notice of Termination. Any termination of the Executive’s employment hereunder by the Company or by Executive during the Term (other than termination on account of Executive’s death) shall be communicated by written notice of termination (“Notice of Termination”) to the other party hereto. The Notice of Termination shall specify:
i) The termination provision of this Agreement relied upon;
ii) To the extent applicable, the facts and circumstances claimed to provide a basis for termination of the Executive’s employment under the provision so indicated; and
iii) The applicable Termination Date.
g) Termination Date. The Executive’s “Termination Date” shall be:
(i) If Executive’s employment hereunder terminates on account of Executive’s death, the date of the Executive’s death;
(ii) If the Company terminates Executive’s employment hereunder for any reason, the date the Notice of Termination is delivered to the Executive;
(iii) If Executive terminates his employment hereunder with or without Good Reason, the date specified in the Executive’s Notice of Termination.
6. Confidentiality.
a) Confidential Information. The Executive acknowledges that the Executive will occupy a position of trust and confidence. The Company, from time to time, may disclose to the Executive, and the Executive will require access to and may generate confidential and proprietary information (no matter how created or stored) concerning the business practices, products, services, and operations of the Company which is not known to its competitors or within its industry generally and which is of great competitive value to it, including, but not
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limited to: (i) Trade Secrets (as defined herein), inventions, mask works, ideas, concepts, drawings, materials, documentation, procedures, diagrams, specifications, models, processes, formulae, source and object codes, data, software, programs, other works of authorship, know- how, improvements, discoveries, developments, designs and techniques; (ii) information regarding research, development, products, marketing plans, market research and forecasts, bids, proposals, quotes, business plans, budgets, financial information and projections, overhead costs, profit margins, pricing policies and practices, accounts, processes, planned collaborations or alliances, licenses, suppliers and customers; (iii) operational information including deployment plans, means and methods of performing services, operational needs information, and operational policies and practices; and (iv) any information obtained by the Company from any third party that the Company treats or agrees to treat as confidential or proprietary information of the third party (collectively, “Confidential Information”). The Executive acknowledges and agrees that Confidential Information includes Confidential Information disclosed to the Executive prior to entering into this Agreement.
b) Trade Secrets. “Trade Secrets” means any information, including any data, plan, drawing, specification, pattern, procedure, method, computer data, system, program or design, device, list, tool, or compilation, that relates to the present or planned business of the Company and which: (i) derives economic value, actual or potential, from not being generally known to, and not readily ascertainable by proper means to, other persons who can obtain economic value from their disclosure or use; and (ii) is the subject of efforts that are reasonable under the circumstances to maintain their secrecy. To the extent that the foregoing definition is inconsistent with a definition of “trade secret” under applicable law, the latter definition shall control.
c) Restrictions On Use and Disclosure of Confidential Information. The Executive agrees during his employment and after his employment ends, the Executive will hold the Confidential Information in strict confidence and will neither use the information nor disclose it to anyone, except to the extent necessary to carry out the Executive’s responsibilities as an employee of the Company or as specifically authorized in writing by a duly authorized officer of the Company. Nothing in this Agreement shall be deemed to prohibit the Executive from disclosing any concerns about suspected unlawful conduct to any proper government authority subject to proper jurisdiction. This provision shall survive the termination of the Executive’s employment for so long as the Company maintains the secrecy of the Confidential Information and the Confidential Information has competitive value; and to the extent such information is otherwise protected by statute for a longer period, for example and not by way of limitation, the Defend Trade Secrets Act of 2016 (“DTSA”), then until such information ceases to have statutory protection.
d) Defend Trade Secrets Act. Misappropriation of a Trade Secret of the Company in breach of this Agreement may subject the Executive to liability under the DTSA, entitle the Company to injunctive relief, and require the Executive to pay compensatory damages, double damages, and attorneys’ fees to the Company. Notwithstanding any other provision of this Agreement, Executive hereby is notified in accordance with the DTSA that Executive will not be held criminally or civilly liable under a federal or state law for the disclosure of a trade secret that is made in confidence to a federal, state or local government official, either directly or indirectly, or to an attorney, and solely for the purpose of reporting or investigating a suspected violation of law; or is made in a complaint or other document filed in a lawsuit or other
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proceeding, if such filing is made under seal. If the Executive files a lawsuit for retaliation by the Company for reporting a suspected violation of law, the Executive may disclose the trade secret to the Executive’s attorney and use the trade secret information in the court proceeding, provided that the Executive must file any document containing the trade secret under seal, and must not disclose the trade secret, except pursuant to court order.
7. Inventions and Proprietary Information.
a) Definitions.
(i) “Intellectual Property Rights” means all rights in and to United States and foreign (A) patents, patent disclosures, and inventions (whether patentable or not), (B) trademarks, service marks, trade dress, trade names, logos, corporate names, and domain names, and other similar designations of source or origin, together with the goodwill symbolized by any of the foregoing, (C) copyrights and works of authorship (whether copyrightable or not), including computer programs, mask works, and rights in data and databases, (D) trade secrets, know-how, and other confidential information, (E) all other intellectual property rights, in each case whether registered or unregistered, and including all rights of priority in and all rights to apply to register for such rights, all registrations and applications for, and renewals or extensions of, such rights, and all similar or equivalent rights or forms of protection in any part of the world, (F) any and all royalties, fees, income, payments, and other proceeds with respect to any and all of the foregoing, and (G) any and all claims and causes of action with respect to any of the foregoing, including all rights to recover for infringement, misappropriation, or dilution of the foregoing, and all rights corresponding thereto throughout the world.
(ii) “Work Product” means, without limitation, any and all ideas, concepts, information, materials, processes, methods, data, programs, know-how, technology, improvements, discoveries, developments, works of authorship, designs, artwork, formulae, other copyrightable works, and techniques and all Intellectual Property Rights that presently exist or may come to exist in the future in any of the items listed above.
b) Work Product.
(i) All right, title, and interest in and to all Work Product as well as any and all Intellectual Property Rights therein and all improvements thereto shall be the sole and exclusive property of the Company.
(ii) The Company shall have the unrestricted right (but not any obligation), in its sole and absolute discretion, to (A) use, commercialize, or otherwise exploit any Work Product or (B) file an application for patent, copyright registration, or registration of any other Intellectual Property Rights, and prosecute or abandon such application prior to issuance or registration. No royalty or other consideration shall be due or owing to the Executive now or in the future as a result of such activities.
(iii) The Work Product is and shall at all times remain the Confidential Information of the Company.
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c) Work Made for Hire; Assignment; Limitations.
(i) The Executive acknowledges that, by reason of being employed by the Company at the relevant times, to the extent permitted by law, all Work Product consisting of copyrightable subject matter is “work made for hire” as defined in the Copyright Act of 1976 (17 U.S.C. § 101), and such copyrights are therefore owned by the Company. To the extent that the foregoing does not apply, the Executive hereby irrevocably assigns to the Company, and its successors and assigns, for no additional consideration, the Executive’s entire right, title, and interest, in and to all Work Product and Intellectual Property Rights therein, including without limitation the right to sue, counterclaim, and recover for all past, present, and future infringement, misappropriation, or dilution thereof, and all rights corresponding thereto throughout the world. Nothing contained in this Agreement shall be construed to reduce or limit the Company’s right, title, or interest in any Work Product or Intellectual Property Rights so as to be less in any respect than the Company would have had in the absence of this Agreement.
(ii) To the extent that the Executive has not separately assigned any Prior Inventions, the Executive hereby irrevocably assigns to the Company, and its successors and assigns, for no additional consideration, the Executive’s entire right, title, and interest in and to all Prior Inventions, including without limitation the right to sue, counterclaim, and recover for all past, present, and future infringement, misappropriation, or dilution thereof, and all rights corresponding thereto throughout the world. Nothing contained in this Agreement shall be construed to reduce or limit the Company’s right, title, or interest in any Prior Inventions so as to be less in any respect than the Company would have had in the absence of this Agreement.
8. Return of Property/Post-Employment Representations. On the date of the Executive’s termination of employment with the Company for any reason (or at any time prior thereto at the Company’s request), the Executive shall return all property and documents belonging to the Company and not retain any copies, including, but not limited to, any keys, access cards, badges, laptops, computers, cell phones, wireless electronic mail devices, USB drives, other equipment, documents, reports, files, and other property provided by or belonging to the Company. Executive shall provide all usernames and passwords to all electronic devices, documents, and accounts, including any social media accounts Executive used in connection with his duties. Upon request, the Executive shall return all Company-related documents and data on personal devices and delete such documents and data upon the request of the Company. The Executive shall give written acknowledgment of the return and/or deletion of Company-related documents and data upon request of the Company. On and after the Termination Date, Executive shall no longer represent to anyone that he remains employed by the Company and shall take affirmative action to amend any statements to the contrary on any social media sites, including but not limited to Linked-in and Facebook.
9. Restrictive Covenants.
a) Acknowledgement. The Executive understands that the nature of the Executive’s position gives the Executive access to and knowledge of Confidential Information and places the Executive in a position of trust and confidence with the Company. The Executive further understands and acknowledges that the Company’s ability to reserve these for the exclusive knowledge and use of the Company is of great competitive importance and commercial value to the Company.
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b) Non-Competition. Because of the Company’s legitimate business interest as described herein and the good and valuable consideration offered to the Executive, during the Term and for six (6) months thereafter, to run consecutively, beginning on the last day of the Executive’s employment with the Company, regardless of the reason for the termination and whether employment is terminated at the option of the Executive or the Company, the Executive agrees and covenants not to engage in Prohibited Activity within the United States of America.
c) Prohibited Activity. “Prohibited Activity” is activity in which the Executive contributes the Executive’s knowledge, directly or indirectly, in whole or in part, as an employee, employer, owner, operator, manager, advisor, consultant, agent, employee, partner, director, stockholder, officer, volunteer, intern, or any other similar capacity to an entity engaged in the same or similar business as the Company, including those engaged in the business of developing, manufacturing, marketing, distributing, or selling, vaping products. Prohibited Activity also includes activity that may require or inevitably requires disclosure of the Company’s trade secrets, proprietary information, or Confidential Information.
d) Ownership of Competing Business. Nothing herein shall prohibit the Executive from purchasing or owning less than five percent (5%) of the publicly traded securities of any corporation, provided that such ownership represents a passive investment, and that the Executive is not a controlling person of, or a member of a group that controls, such corporation.
10. Non-Solicitation of Employees. The Executive agrees and covenants not to directly or indirectly solicit, hire, recruit, attempt to hire or recruit, or induce the termination of employment of any employee of the Company, or attempt to do so, during the Term and for twelve (12) months thereafter, to run consecutively, beginning on the last day of the Executive’s employment with the Company.
11. Non-Solicitation of Customers. The Executive understands and acknowledges that because of the Executive’s experience with, and relationship to, the Company, the Executive will have access to and learn about the Company’s customer information. “Customer Information” includes, but is not limited to, names, phone numbers, addresses, email addresses, order history, order preferences, chain of command, decisionmakers, pricing information, and other information identifying facts and circumstances specific to the customer and to the relevant services. The Executive understands and acknowledges that loss of this customer relationship and/or goodwill will cause significant and irreparable harm. The Executive agrees and covenants, during the Term and for (12) months thereafter, to run consecutively, beginning on the last day of the Executive’s employment with the Company, not to directly or indirectly solicit, contact (including but not limited to email, regular mail, express mail, telephone, fax, instant message, or social media), attempt to contact, or meet with the Company’s current, former. or prospective customers for purposes of offering or accepting goods or services similar to or competitive with those offered by the Company.
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12. Use of Name and Likeness. Executive grants the Company permission to use his name, voice, image or likeness, for the purposes of advertising and promoting the Company, or for other purposes deemed appropriate by the Company in its reasonable discretion, except to the extent expressly prohibited by law for the duration of the Term and for a period of one year after the Term ends.
13. Survival of Provisions. The respective rights and obligations of the parties hereunder shall survive any termination of this Agreement hereunder for any reason to the extent necessary to the intended provision of such rights and the intended performance of such obligations.
14. Notices. For the purposes of this Agreement, notices, demands and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been given when delivered by email with return receipt requested, upon the obtaining of a valid return receipt from the recipient, by hand, or mailed by nationally recognized overnight delivery service, addressed to the Parties’ addresses specified below or to such other address as any Party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt:
| To the Company: | To the Executive: |
| Kaival Brands Innovations Group, Inc. | Mr. Barry Michael Hopkins |
| Attn: Stephen Sheriff, COO | At the address on Executive’s most |
| 4460 Old Dixie Highway | recent Form W-4 |
| Grant-Valkaria, Florida 32949 | At any person email address Executive |
| Email: stephen@kaivalbrands.com | has provided to the Company |
With
a copy that
will not constitute
notice to:
Lawrence A. Rosenbloom, Esq.
Ellenoff Grossman & Schole LLP
1345 Avenue of the Americas, 11th Floor New York, New York 10105
Email: lrosenbloom@egsllp.com
15. Tax Matters. The Company may withhold from any and all amounts payable under this Agreement or otherwise such federal, state and local taxes as may be required to be withheld pursuant to any applicable law or regulation.
16. Assignment. The Executive may not assign any part of the Executive’s rights or obligations under this Agreement. The Executive agrees and hereby consents that the Company may assign this Agreement to a third party that acquires or succeeds to the Company’s business, that the provisions hereof are enforceable against the Executive by such assignee or successor in interest, and that this Agreement shall become an obligation of, inure to the benefit of, and be assigned to, any legal successor or successors to the Company.
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17. Governing Law/Venue/Jury Trial Waiver. This Agreement, the rights and obligations of the Parties hereto, and any claims or disputes relating thereto, shall be governed by, and construed in accordance with the laws of the State of Florida (without regard to its conflicts of laws provisions). The exclusive venue for any and all disputes arising from or concerning this Agreement, Executive’s employment with the Company, or the termination thereof, shall be the courts of the State of Florida located in the County of Brevard and/or the United States District Court for the Middle District of Florida. To ensure expeditious resolution of all such disputes the parties hereby WAIVE TRIAL BY JURY in all such disputes.
18. Headings. Titles or captions of sections or paragraphs contained in this Agreement are intended solely for the convenience of reference, and shall not serve to define, limit, extend, modify, or describe the scope of this Agreement or the meaning of any provision hereof. The language used in this Agreement is deemed to be the language chosen by the Parties to express their mutual intent, and no rule of strict construction will be applied against any person.
19. Severability. The provisions of this Agreement are severable. The unenforceability or invalidity of any provision or portion of this Agreement in any jurisdiction shall not affect the validity, legality, or enforceability of the remainder of this Agreement, it being intended that all rights and obligations of the Parties hereunder shall be enforceable to the full extent permitted by applicable law.
20. Waiver; Modification. No provision of this Agreement may be modified, waived, or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the Executive and a duly authorized officer of the Company. No waiver by either Party hereto at any time of any breach by the other Party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other Party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time.
21. Recitals; Entire Agreement. The Recitals are hereby incorporated into this Agreement. This Agreement sets forth the entire agreement of the Parties with respect to the subject matter contained herein and supersedes any and all prior agreements or understandings between the Executive and the Company with respect to the subject matter hereof. No agreements, inducements, or representations, oral or otherwise, express, or implied, with respect to the subject matter hereof have been made by either Party which are not expressly set forth in this Agreement.
22. Counterparts. This Agreement may be executed in counterparts, and each executed counterpart shall have the efficacy of a signed original and may be transmitted by facsimile or email. Each copy, facsimile copy, or emailed copy of any such signed counterpart may be used in lieu of the original for any purpose.
[Signature Page Follows]
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IN WITNESS WHEREOF, the Parties hereto have executed this Executive Employment Agreement effective as of the date first written above.
| KAIVAL BRANDS INNOVATIONS GROUP, INC. | ||
| By: | /s/ Stephen Sheriff | |
| Name: | Stephen Sheriff | |
| Title: | Chief Operating Officer | |
| EXECUTIVE | |
| /s/ Barry Michael Hopkins | |
| Barry Michael Hopkins |
13
EXHIBIT 19.1
Second Amended and Restated
Insider Trading Compliance Manual
Kaival Brands Innovations Group, Inc.
Adopted: March 19, 2023
To take an active role in the prevention of insider trading violations by its officers, directors, employees, consultants, attorneys, advisors and other related individuals, the Board of Directors (the “Board”) of Kaival Brands Innovations Group, Inc., a Delaware corporation (the “Company”), has adopted the policies and procedures described in this Insider Trading Compliance Manual.
I. Adoption of Insider Trading Policy.
Effective as of the date first written above, the Board has adopted the Insider Trading Policy attached hereto as Exhibit A (as the same may be amended from time to time by the Board, the “Policy”), which prohibits trading based on “material, nonpublic information” regarding the Company or any company whose securities are listed for trading or quotation in the United States (“Material Non-Public Information”).
This Policy covers all officers and directors of the Company and its subsidiaries, all other employees of the Company and its subsidiaries, and consultants or contractors to the Company or its subsidiaries who have or may have access to Material Non-Public Information and members of the immediate family or household of any such person. This Policy (and/or a summary thereof) is to be delivered to all employees, consultants and related individuals who are within the categories of covered persons upon the commencement of their relationships with the Company.
II. Designation of Certain Persons.
A. Section 16 Individuals. All directors and executive officers of the Company will be subject to the reporting and liability provisions of Section 16 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and the rules and regulations promulgated thereunder (“Section 16 Individuals”).
B. Other Persons Subject to Policy. In addition, certain employees, consultants, and advisors of the Company as described in Section I above have, or are likely to have, from time to time access to Material Non-Public Information and together with the Section 16 Individuals, are subject to the Policy, including the pre-clearance requirement described in Section IV. A. below.
C. Post-Termination Transactions. This Policy continues to apply to transactions in Company securities even after an employee, officer or director has resigned or terminated employment. If the person who resigns or separates from the Company is in possession of Material Non-Public Information at that time, he or she may not trade in Company securities until that information has become public or is no longer material.
III. Appointment of Insider Trading Compliance Officer.
The Board has appointed Thomas Metzler (effective as of November 9, 2023) as the Insider Trading Compliance Officer (the “Compliance Officer”).
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IV. Duties of Compliance Officer.
The Compliance Officer has been designated by the Board to handle any and all matters relating to the Company’s Insider Trading Compliance Program. Certain of those duties may require the advice of outside counsel with special expertise in securities issues and relevant law. The duties of the Compliance Officer shall include the following:
A. Pre-clearing all transactions involving the Company’s securities by the Section 16 Individuals and those individuals having regular access to Material Non-Public Information in order to determine compliance with the Policy, insider trading laws, Section 16 of the Exchange Act and Rule 144 promulgated under the Securities Act of 1933, as amended (“Rule 144”). Attached hereto as Exhibit B is a Pre-Clearance Checklist to assist the Compliance Officer’s performance of this duty.
B. Assisting in the preparation and filing of Section 16 reports (Forms 3, 4 and 5) for all Section 16 Individuals, bearing in mind, however, that the preparation of such reports is undertaken by the Company as a courtesy only and that the Section 16 Individuals alone (and not the Company, its employees or advisors) shall be solely responsible for the content and filing of such reports and for any violations of Section 16 under the Exchange Act and related rules and regulations.
C. Serving as the designated recipient at the Company of copies of reports filed with the Securities and Exchange Commission (“SEC”) by Section 16 Individuals under Section 16 of the Exchange Act.
D. Performing periodic reviews of available materials, which may include Forms 3, 4 and 5, Form 144, officers and director’s questionnaires, and reports received from the Company’s stock administrator and transfer agent, to determine trading activity by officers, directors and others who have, or may have, access to Material Non-Public Information.
E. Circulating the Policy (and/or a summary thereof) to all covered employees, including Section 16 Individuals, on an annual basis, and providing the Policy and other appropriate materials to new officers, directors and others who have, or may have, access to Material Non-Public Information.
F. Assisting the Board in implementation of the Policy and all related Company policies.
G. Coordinating with Company internal or external legal counsel regarding all securities compliance matters.
H. Retaining copies of all appropriate securities reports, and maintaining records of his or her activities as Compliance Officer.
[Acknowledgement Appears on the Next Page]
| 2 |
ACKNOWLEDGMENT
I hereby acknowledge that I have received a copy of the Insider Trading Compliance Manual of Kaival Brands Innovations Group, Inc. (the “Insider Trading Manual”). Further, I certify that I have reviewed the Insider Trading Manual, understand the policies and procedures contained therein and agree to be bound by and adhere to these policies and procedures.
| Dated: | |||
| Signature | |||
| Name: |
| 3 |
Exhibit A
KAIVAL BRANDS INNOVATIONS GROUP, INC.
Second Amended and Restated
Insider Trading Policy
and Guidelines with Respect to Certain Transactions in Company Securities
APPLICABILITY OF POLICY
This Policy applies to all transactions in the securities of Kaival Brands Innovations Group, Inc. (the “Company”), including common stock, options and warrants to purchase common stock and any other securities the Company may issue from time to time, such as preferred stock, warrants and convertible notes, as well as to derivative securities relating to the Company’s stock, whether or not issued by the Company, such as exchange-traded options. It applies to all officers and directors of the Company, all other employees of the Company and its subsidiaries, and consultants or contractors to the Company or its subsidiaries who have or may have access to Material Nonpublic Information (as defined below) regarding the Company and members of the immediate family or household of any such person. This group of people is sometimes referred to in this Policy as “Insiders.” This Policy also applies to any person who receives Material Nonpublic Information from any Insider.
Any person who possesses Material Nonpublic Information regarding the Company is an Insider for so long as such information is not publicly known.
DEFINITION OF MATERIAL NONPUBLIC INFORMATION
It is not possible to define all categories of material information. However, the U.S. Supreme Court and other federal courts have ruled that information should be regarded as “material” if there is a substantial likelihood that a reasonable investor:
| (1) | would consider the information important in making an investment decision; and |
| (2) | would view the information as having significantly altered the “total mix” of available information about the Company. |
“Nonpublic” information is information that has not been previously disclosed to the general public and is otherwise not available to the general public.
While it may be difficult to determine whether particular information is material, there are various categories of information that are particularly sensitive and, as a general rule, should always be considered material. In addition, material information may be positive or negative. Examples of such information may include:
| A-1 |
| · | Financial results |
| · | Information relating to the Company’s stock exchange listing or SEC regulatory issues |
| · | Information regarding regulatory review of Company products |
| · | Intellectual property and other proprietary/scientific information |
| · | Projections of future earnings or losses |
| · | Major contract awards, cancellations or write-offs |
| · | Joint ventures/commercial partnerships with third parties |
| · | Research milestones and related payments or royalties |
| · | News of a pending or proposed merger or acquisition |
| · | News of the disposition of material assets |
| · | Impending bankruptcy or financial liquidity problems |
| · | Gain or loss of a substantial customer or supplier |
| · | New product announcements of a significant nature |
| · | Significant pricing changes |
| · | Stock splits |
| · | New equity or debt offerings |
| · | Significant litigation exposure due to actual or threatened litigation |
| · | Changes in senior management or the Board of Directors of the Company |
| · | Capital investment plans |
| · | Changes in dividend policy |
| A-2 |
CERTAIN EXCEPTIONS
For purposes of this Policy:
1. Stock Options Exercises. For purposes of this Policy, the Company considers that the exercise of stock options under the Company’s stock option plans (but not the sale of the underlying stock) to be exempt from this Policy. This Policy does apply, however, to any sale of stock as part of a broker-assisted “cashless” exercise of an option, or any market sale for the purpose of generating the cash needed to pay the exercise price of an option.
2. 401(k) Plan. This Policy does not apply to purchases of Company stock in the Company’s 401(k) plan resulting from periodic contributions of money to the plan pursuant to payroll deduction elections. This Policy does apply, however, to certain elections that may be made under the 401(k) plan, including (a) an election to increase or decrease the percentage of periodic contributions that will be allocated to the Company stock fund, if any, (b) an election to make an intra-plan transfer of an existing account balance into or out of the Company stock fund, (c) an election to borrow money against a 401(k) plan account if the loan will result in a liquidation of some or all of a participant’s Company stock fund balance and (d) an election to pre-pay a plan loan if the pre-payment will result in allocation of loan proceeds to the Company stock fund.
3. Employee Stock Purchase Plan. This Policy does not apply to purchases of Company stock in the Company’s employee stock purchase plan, if any, resulting from periodic contributions of money to the plan pursuant to the elections made at the time of enrollment in the plan. This Policy also does not apply to purchases of Company stock resulting from lump sum contributions to the plan, provided that the participant elected to participate by lump-sum payment at the beginning of the applicable enrollment period. This Policy does apply to a participant’s election to participate in or increase his or her participation in the plan, and to a participant’s sales of Company stock purchased pursuant to the plan.
4. Dividend Reinvestment Plan. This Policy does not apply to purchases of Company stock under the Company’s dividend reinvestment plan, if any, resulting from reinvestment of dividends paid on Company securities. This Policy does apply, however, to voluntary purchases of Company stock that result from additional contributions a participant chooses to make to the plan, and to a participant’s election to participate in the plan or increase his level of participation in the plan. This Policy also applies to his or her sale of any Company stock purchased pursuant to the plan.
5. General Exceptions. Any exceptions to this Policy other than as set forth above may only be made by advance written approval of each of: (i) the Company’s President or Chief Executive Officer, (ii) the Company’s Insider Trading Compliance Officer and (iii) the Chairman of the Governance and Nominating Committee (or similar committee) of the Board. Any such exceptions shall be immediately reported to the remaining members of the Board.
STATEMENT OF POLICY
General Policy
It is the policy of the Company to prohibit the unauthorized disclosure of any nonpublic information acquired in the workplace and the misuse of Material Nonpublic Information in securities trading related to the Company or any other company.
| A-3 |
Specific Policies
1. Trading on Material Nonpublic Information. With certain exceptions, no Insider shall engage in any transaction involving a purchase or sale of the Company’s or any other company’s securities, including any offer to purchase or offer to sell, during any period commencing with the date that he or she possesses Material Nonpublic Information concerning the Company, and ending at the close of business on the second Trading Day following the date of public disclosure of that information, or at such time as such nonpublic information is no longer material. However, see Section 2 under “Permitted Trading Period” below for a full discussion of trading pursuant to a pre-established plan or by delegation.
As used herein, the term “Trading Day” shall mean a day on which national stock exchanges are open for trading.
2. Tipping. No Insider shall disclose (“tip”) Material Nonpublic Information to any other person (including family members) where such information may be used by such person to his or her profit by trading in the securities of companies to which such information relates, nor shall such Insider or related person make recommendations or express opinions on the basis of Material Nonpublic Information as to trading in the Company’s securities.
Regulation FD (Fair Disclosure) is an issuer disclosure rule implemented by the SEC that addresses selective disclosure of Material Nonpublic Information. The regulation provides that when the Company, or person acting on its behalf, discloses material nonpublic information to certain enumerated persons (in general, securities market professionals and holders of the Company’s securities who may well trade on the basis of the information), it must make public disclosure of that information. The timing of the required public disclosure depends on whether the selective disclosure was intentional or unintentional; for an intentional selective disclosure, the Company must make public disclosures simultaneously; for a non-intentional disclosure the Company must make public disclosure promptly. Under the regulation, the required public disclosure may be made by filing or furnishing a Form 8-K, or by another method or combination of methods that is reasonably designed to effect broad, non-exclusionary distribution of the information to the public.
It is the policy of the Company that all public communications of the Company (including, without limitation, communications with the press, other public statements, statements made via the Internet or social media outlets, or communications with any regulatory authority) be handled only through the Company’s President and/or Chief Executive Officer (the “CEO”), an authorized designee of the CEO or the Company’s public or investor relations firm. Please refer all press, analyst or similar requests for information to the CEO and do not respond to any inquiries without prior authorization from the CEO. If the CEO is unavailable, the Company’s Chief Financial Officer (or the authorized designee of such officer) will fill this role.
3. Confidentiality of Nonpublic Information. Nonpublic information relating to the Company is the property of the Company and the unauthorized disclosure of such information (including, without limitation, via email or by posting on Internet message boards, blogs or social media) is strictly forbidden.
4. Duty to Report Inappropriate and Irregular Conduct. All employees, and particularly managers and/or supervisors, have a responsibility for maintaining financial integrity within the company, consistent with generally accepted accounting principles and both federal and state securities laws. Any employee who becomes aware of any incidents involving financial or accounting manipulation or irregularities, whether by witnessing the incident or being told of it, must report it to their immediate supervisor and to any member of the Company’s Audit Committee. In certain instances, employees are allowed to participate in federal or state proceedings. For a more complete understanding of this issue, employees should consult their employee manual and/or seek the advice from their direct report or the Company’s principal executive officers (who may, in turn, seek input from the Company’s outside legal counsel).
| A-4 |
POTENTIAL CRIMINAL AND CIVIL LIABILITY
AND/OR DISCIPLINARY ACTION
1. Liability for Insider Trading. Insiders may be subject to penalties of up to $5,000,000 for individuals (and $25,000,000 for a business entity) and up to twenty (20) years in prison for engaging in transactions in the Company’s securities at a time when they possess Material Nonpublic Information regarding the Company. In addition, the SEC has the authority to seek a civil monetary penalty of up to three times the amount of profit gained or loss avoided by illegal insider trading. “Profit gained” or “loss avoided” generally means the difference between the purchase or sale price of the Company’s stock and its value as measured by the trading price of the stock a reasonable period after public dissemination of the nonpublic information.
2. Liability for Tipping. Insiders may also be liable for improper transactions by any person (commonly referred to as a “tippee”) to whom they have disclosed Material Nonpublic Information regarding the Company or to whom they have made recommendations or expressed opinions on the basis of such information as to trading in the Company’s securities. The SEC has imposed large penalties even when the disclosing person did not profit from the trading. The SEC, the stock exchanges and the National Association of Securities Dealers, Inc. use sophisticated electronic surveillance techniques to monitor and uncover insider trading.
3. Possible Disciplinary Actions. Individuals subject to the Policy who violate this Policy shall also be subject to disciplinary action by the Company, which may include suspension, forfeiture of perquisites, ineligibility for future participation in the Company’s equity incentive plans and/or termination of employment.
PERMITTED TRADING PERIOD
1. Black-Out Period and Trading Window. To ensure compliance with this Policy and applicable federal and state securities laws, the Company requires that all officers, directors, members of the immediate family or household of any such person and others who are subject to this Policy refrain from conducting any transactions involving the purchase or sale of the Company’s securities, other than during the period in any fiscal quarter commencing at the close of business on the second Trading Day following the date of public disclosure of the financial results for the prior fiscal quarter or year and ending at the close business on the fifteenth (15th) calendar day of the third month of the subsequent fiscal quarter (the “Trading Window”). If such public disclosure occurs on a Trading Day before the markets close, then such date of disclosure shall be considered the first Trading Day following such public disclosure.
It is the Company’s policy that the period when the Trading Window is “closed” is a particularly sensitive periods of time for transactions in the Company’s securities from the perspective of compliance with applicable securities laws. This is because Insiders will, as any quarter progresses, are increasingly likely to possess Material Nonpublic Information about the expected financial results for the quarter. The purpose of the Trading Window is to avoid any unlawful or improper transactions or the appearance of any such transactions.
It should be noted that even during the Trading Window any person possessing Material Nonpublic Information concerning the Company shall not engage in any transactions in the Company’s (or any other companies, as applicable) securities until such information has been known publicly for at least two Trading Days. The Company has adopted the policy of delaying trading for “at least two Trading Days” because the securities laws require that the public be informed effectively of previously undisclosed material information before Insiders trade in the Company’s stock. Public disclosure may occur through a widely disseminated press release or through filings, such as Forms 10-Q and 8-K, with the SEC. Furthermore, in order for the public to be effectively informed, the public must be given time to evaluate the information disclosed by the Company. Although the amount of time necessary for the public to evaluate the information may vary depending on the complexity of the information, generally two Trading Days is a sufficient period of time.
| A-5 |
From time to time, the Company may also require that Insiders suspend trading because of developments known to the Company and not yet disclosed to the public. In such event, such persons may not engage in any transaction involving the purchase or sale of the Company’s securities during such period and may not disclose to others the fact of such suspension of trading.
Although the Company may from time to time require during a Trading Window that Insiders and others suspend trading because of developments known to the Company and not yet disclosed to the public, each person is individually responsible at all times for compliance with the prohibitions against insider trading. Trading in the Company’s securities during the Trading Window should not be considered a “safe harbor,” and all directors, officers and other persons should use good judgment at all times.
Notwithstanding these general rules, Insiders may trade outside of the Trading Window provided that such trades are made pursuant to a legally compliant, pre-established plan or by delegation established at a time that the Insider is not in possession of material nonpublic information. These alternatives are discussed in the next section.
2. Trading According to a Pre-Established Plan (10b5-1) or by Delegation. The SEC has adopted Rule 10b5-1 (which was amended in December 2022) under which insider trading liability can be avoided if Insiders follow very specific procedures. In general, such procedures involve trading according to pre-established instructions, plans or programs (a “10b5-1 Plan”) after a required “cooling off” period described below.
10b5-1 Plans must:
(a) Be documented by a contract, written plan, or formal instruction which provides that the trade take place in the future. For example, an Insider can contract to sell his or her shares on a specific date, or simply delegate such decisions to an investment manager, 401(k) plan administrator or similar third party. This documentation must be provided to the Company’s Insider Trading Compliance Officer;
(b) Include in its documentation the specific amount, price and timing of the trade, or the formula for determining the amount, price and timing. For example, the Insider can buy or sell shares in a specific amount and on a specific date each month, or according to a pre-established percentage (of the Insider’s salary, for example) each time that the share price falls or rises to pre-established levels. In the case where trading decisions have been delegated (i.e., to a third party broker or money manager), the specific amount, price and timing need not be provided;
(c) Be implemented at a time when the Insider does not possess material non-public information. As a practical matter, this means that the Insider may set up 10b5-1 Plans, or delegate trading discretion, only during a “Trading Window” (discussed in Section 1, above), assuming the Insider is not in possession of material non-public information;
(d) Remain beyond the scope of the Insider’s influence after implementation. In general, the Insider must allow the 10b5-1 Plan to be executed without changes to the accompanying instructions, and the Insider cannot later execute a hedge transaction that modifies the effect of the 10b5-1 Plan. Insiders should be aware that the termination or modification of a 10b5-1 Plan after trades have been undertaken under such plan could negate the 10b5-1 affirmative defense afforded by such program for all such prior trades. As such, termination or modification of a 10b-5 Plan should only be undertaken in consultation with your legal counsel. If the Insider has delegated decision-making authority to a third party, the Insider cannot subsequently influence the third party in any way and such third party must not possess material non-public information at the time of any of the trades;
| A-6 |
(e) Be subject to a “cooling off” period. Effective February 27, 2023, Rule 10b5-1 contains “cooling-off period” for directors and officers that prohibit such insiders from trading in a 10b5-1 Plan until the later of (i) 90 days following the plan’s adoption or modification or (ii) two business days following the Company’s disclosure (via a report filed with the SEC) of its financial results for the fiscal quarter in which the plan was adopted or modified; and
(f) Contain Insider certifications. Effective February 27, 2023, directors and officers are required to include a certification in their 10b5-1 Plans to certify that at the time the plan is adopted or modified: (i) they are not aware of Material Nonpublic Information about the Company or its securities and (ii) they are adopting the 10b5-1 Plan in good faith and not as part of a plan or scheme to evade the anti-fraud provisions of the Exchange Act.
Important: In addition, effective February 27, 2023: (i) Insiders are prohibited from having multiple overlapping 10b5-1 Plans or more than one plan in any given year, (ii) a modification relating to amount, price and timing of trades under a 10b5-1 Plan is deemed a plan termination which requires a new cooling off period, and (iii) whether a particular trade is undertaken pursuant to a 10b5-1 Plan will need to be disclosed (by checkoff box) on the applicable Forms 4 or 5 of the Insider.
Pre-Approval Required: Prior to implementing a 10b5-1 Plan, all officers and directors must receive the approval for such plan from (and provide the details of the plan to) the Company’s Insider Trading Compliance Officer.
3. Pre-Clearance of Trades. Even during a Trading Window, all Insiders, must comply with the Company’s “pre-clearance” process prior to trading in the Company’s securities, implementing a pre-established plan for trading, or delegating decision-making authority over the Insider’s trades. To do so, each Insider must contact the Company’s Insider Trading Compliance Officer prior to initiating any of these actions. The Company may also find it necessary, from time to time, to require compliance with the pre-clearance process from others who may be in possession of Material Nonpublic Information.
4. Individual Responsibility. Every person subject to this Policy has the individual responsibility to comply with this Policy against insider trading, regardless of whether the Company has established a Trading Window applicable to that Insider or any other Insiders of the Company. Each individual, and not necessarily the Company, is responsible for his or her own actions and will be individually responsible for the consequences of their actions. Therefore, appropriate judgment, diligence and caution should be exercised in connection with any trade in the Company’s securities. An Insider may, from time to time, have to forego a proposed transaction in the Company’s securities even if he or she planned to make the transaction before learning of the Material Nonpublic Information and even though the Insider believes he or she may suffer an economic loss or forego anticipated profit by waiting.
APPLICABILITY OF POLICY TO INSIDE INFORMATION
REGARDING OTHER COMPANIES
This Policy and the guidelines described herein also apply to Material Nonpublic Information relating to other companies, including the Company’s customers, vendors or suppliers (“business partners”), when that information is obtained in the course of employment with, or other services performed on behalf of the Company. Civil and criminal penalties, as well as termination of employment, may result from trading on Material Nonpublic Information regarding the Company’s business partners. All Insiders should treat Material Nonpublic Information about the Company’s business partners with the same care as is required with respect to information relating directly to the Company.
| A-7 |
PROHIBITION AGAINST BUYING AND SELLING
COMPANY COMMON STOCK WITHIN A SIX-MONTH PERIOD
Directors, Officers and 10% Shareholders
Purchases and sales (or sales and purchases) of Company common stock occurring within any six-month period in which a mathematical profit is realized result in illegal “short-swing profits.” The prohibition against short-swing profits is found in Section 16 of the Exchange Act. Section 16 was drafted as a rather arbitrary prohibition against profitable “insider trading” in a company’s securities within any six-month period regardless of the presence or absence of material nonpublic information that may affect the market price of those securities. Each executive officer, director and 10% shareholder of the Company is subject to the prohibition against short-swing profits under Section 16. Such persons are required to file Forms 3, 4 and 5 reports reporting his or her initial ownership of the Company’s common stock and any subsequent changes in such ownership. The Sarbanes-Oxley Act of 2002 requires executive officers and directors who must report transactions on Form 4 to do so by the end of the second business day following the transaction date, and amendments to Form 4 adopted effective February 2023 require the reporting person to check on the form if the purchase or sale was undertaken pursuant to a 10b5-1 Plan. Profit realized, for the purposes of Section 16, is calculated generally to provide maximum recovery by the Company. The measure of damages is the profit computed from any purchase and sale or any sale and purchase within the short-swing (i.e., six-month) period, without regard to any setoffs for losses, any first-in or first-out rules, or the identity of the shares of common stock. This approach sometimes has been called the “lowest price in, highest price out” rule.
The rules on recovery of short-swing profits are absolute and do not depend on whether a person has Material Nonpublic Information. In order to avoid trading activity that could inadvertently trigger a short-swing profit, it is the Company’s policy that no executive officer, director and 10% shareholder of the Company who has a 10b5-1 Plan in place may engage in voluntary purchases or sales of Company securities outside of and while such 10b5-1 Plan remains in place.
INQUIRIES
Please direct your questions as to any of the matters discussed in this Policy to the Company’s Insider Trading Compliance Officer.
| A-8 |
Exhibit B
Kaival Brands Innovations Group, Inc.
Insider Trading Compliance Program - Pre-Clearance Checklist
Individual Proposing to Trade:______________________________________
Number of Shares covered by Proposed Trade:_________________________
Date:_________________________
| ● | Trading Window. Confirm that the trade will be made during the Company’s “trading window.” |
| ● | Section 16 Compliance. Confirm, if the individual is subject to Section 16, that the proposed trade will not give rise to any potential liability under Section 16 as a result of matched past (or intended future) transactions. Also, ensure that a Form 4 has been or will be completed and will be timely filed. |
| ● | Prohibited Trades. Confirm, if the individual is subject to Section 16, that the proposed transaction is not a “short sale,” put, call or other prohibited or strongly discouraged transaction. |
| ● | Rule 144 Compliance (as applicable). Confirm that: |
| ● | Current public information requirement has been met; |
| ● | Shares are not restricted or, if restricted, the one year holding period has been met; |
| ● | Volume limitations are not exceeded (confirm that the individual is not part of an aggregated group); |
| ● | The manner of sale requirements have been met; and |
| ● | The Notice of Form 144 Sale has been completed and filed. |
| ● | Rule 10b-5 Concerns. Confirm that (i) the individual has been reminded that trading is prohibited when in possession of any material information regarding the Company that has not been adequately disclosed to the public, and (ii) the Insider Trading Compliance Officer has discussed with the individual any information known to the individual or the Insider Trading Compliance Officer which might be considered material, so that the individual has made an informed judgment as to the presence of inside information. |
| ● | Rule 10b5-1 Matters. Confirm whether the individual has implemented, or proposes to implement, a pre-arranged trading plan under Rule 10b5-1. If so, obtain details of the plan. |
| Signature of Insider Trading Compliance Officer |
Exhibit 21.1
Subsidiaries
| Name | Jurisdiction of Formation |
| Kaival Labs, Inc | Delaware |
| Kaival Brands International, LLC | Delaware |
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the Registration Statements on Form S-3 (File No. 333-258339) and Form S-8 (File No. 333-265897) of our report dated February 13, 2024 with respect to the audited consolidated financial statements of Kaival Brands Innovations Group, Inc. and its subsidiaries (collectively, the “Company”) appearing in this Annual Report on Form 10-K of the Company for the year ended October 31, 2023.
/s/ MaloneBailey, LLP
www.malonebailey.com
Houston, Texas
February 13, 2024
Exhibit 31.1
Certification of Chief Executive Officer
Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934
I, Barry Hopkins, certify that:
1. I have reviewed this Annual Report on Form 10-K 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, which involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| Date: February 13, 2024 | By: | /s/ Barry Hopkins |
| Barry Hopkins | ||
| Executive Chairman, Interim Chief Executive Officer, and President |
Exhibit 31.2
Certification of Chief Financial Officer
Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934
I, Thomas Metzler, certify that:
1. I have reviewed this Annual Report on Form 10-K 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: February 13, 2024 | By: | /s/ Thomas Metzler |
| Thomas Metzler | ||
| Chief Financial Officer, Treasurer and Secretary |
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 Annual Report on Form 10-K of the Company for the Annual period ended October 31, 2021 (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: February 13, 2024 | By: | /s/ Barry Hopkins |
| Barry Hopkins | ||
| Executive Chairman, Interim Chief Executive Officer, and President |
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 Annual Report on Form 10-K of the Company for the Annual period ended October 31, 2021 (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: February 13, 2024 | By: | /s/ Thomas Metzler |
| Thomas Metzler | ||
| Chief Financial Officer, Treasurer and Secretary |
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 97.1
KAIVAL BRANDS INNOVATIONS GROUP, INC.
EXECUTIVE COMPENSATION CLAWBACK POLICY
Adopted as of November 29, 2023
The Board of Directors (the “Board”) of Kaival Brands Innovations Group, Inc. (the “Company”) has adopted the following executive compensation clawback policy (this “Policy”). This Policy shall supplement any other clawback or compensation recovery policy or policies adopted by the Company or included in any agreement between the Company, or any subsidiary of the Company, and a person covered by this Policy. If any such other policy or agreement provides that a greater amount of compensation shall be subject to clawback, such other policy or agreement shall apply to the amount in excess of the amount subject to clawback under this Policy.
This Policy shall be interpreted to comply with Securities and Exchange Commission (“SEC”) Rule 10D-1 and Listing Rule 5608 (the “Listing Rule”) of The Nasdaq Stock Market, LLC (“Nasdaq”), as may be amended or supplemented and interpreted from time to time by Nasdaq. To the extent this Policy is in any manner deemed inconsistent with the Listing Rule, this Policy shall be treated as having been amended to be compliant with the Listing Rule.
1. Definitions. Unless the context otherwise the following definitions apply for purposes of this Policy:
(a) Executive Officer. An executive officer is the Company’s chief executive officer and/or president, principal financial officer, principal accounting officer (or if there is no such accounting officer, the controller), any vice-president of the Company in charge of a principal business unit, division, or function (such as sales, administration, or finance), any other officer who performs a policy-making function, or any other person who performs similar policy-making functions for the Company. Executive officers of the Company’s parent(s) or subsidiaries are deemed executive officers of the Company if they perform such policy making functions for the Company. Policy-making function is not intended to include policy-making functions that are not significant. Identification of an executive officer for purposes of the Listing Rule would include at a minimum executive officers identified in the Listing Rule.
(b) Financial Reporting Measures. Financial reporting measures are measures that are determined and presented in accordance with the accounting principles used in preparing the Company’s financial statements, and any measures that are derived wholly or in part from such measures. Stock price and total shareholder return are also financial reporting measures. A financial reporting measure need not be presented within the financial statements or included in a filing with the SEC and may be such financial measures as may be determined by the Board or the Compensation Committee thereof (the “Compensation Committee”).
(c) Incentive-Based Compensation. Incentive-based compensation is any compensation that is granted, earned or vested based wholly or in part upon the attainment of a financial reporting measure.
(d) Received. Incentive-based compensation is deemed “received” in the Company’s fiscal period during which the financial reporting measure specified in the incentive-based compensation award is attained, even if the payment or grant of the incentive-based compensation occurs after the end of that period.
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2. Application of this Policy. This recovery of Incentive-Based Compensation from an Executive Officer as provided for in this Policy shall apply only in the event that the Company is required to prepare an accounting restatement due to the material noncompliance of Company with any financial reporting requirement under the United States securities laws, including any required accounting restatement to correct an error in previously issued financial statements that is material to the previously issued financial statements, or that would result in a material misstatement if the error were corrected in the current period or left uncorrected in the current period.1
3. Recovery Period.
(a) The Incentive-Based Compensation subject to recovery is the Incentive-Based Compensation Received during the three (3) completed fiscal years immediately preceding the date that the Company is required to prepare an accounting restatement as described in Section 2 above, provided that the person served as an Executive Officer at any time during the performance period applicable to the Incentive-Based Compensation in question. The date that the Company is required to prepare an accounting restatement shall be determined pursuant to the Listing Rule.
(b) Notwithstanding the foregoing, this Policy shall only apply if the Incentive-Based Compensation is Received (i) while the Company has a class of securities listed on Nasdaq and (ii) on or after October 2, 2023.
(c) The provisions of the Listing Rule shall apply with respect to Incentive-Based Compensation received during a transition period arising due to a change in the Company’s fiscal year.
4. Erroneously Awarded Compensation. The amount of Incentive-Based Compensation subject to recovery from the applicable Executive Officers under this Policy (“Erroneously Awarded Compensation”) shall be equal to the amount of Incentive-Based Compensation Received that exceeds the amount of Incentive Based-Compensation that otherwise would have been Received had it been determined based on the restated amounts and shall be computed without regard to any taxes paid. For Incentive-Based Compensation based on stock price or total shareholder return, where the amount of Erroneously Awarded Compensation is not subject to mathematical recalculation directly from the information in an accounting restatement: (a) the amount shall be based on a reasonable estimate by the Company’s Chief Financial Officer (or principal accounting officer, if the office of Chief Financial Officer is not then filled) of the effect of the accounting restatement on the stock price or total shareholder return upon which the Incentive-Based Compensation was received, which estimate shall be subject to the review and approval of the Compensation Committee; and (b) the Company must maintain reasonable documentation of the determination of that reasonable estimate and provide such documentation to Nasdaq if requested. Notwithstanding the foregoing, if the proposed Incentive-Based Compensation recovery would affect compensation paid to the Company’s Chief Financial Officer, the determination shall be made by the Compensation Committee.
5. Timing of Recovery. The Company shall recover any Erroneously Awarded Compensation reasonably promptly except to the extent that the conditions of paragraphs (a), (b), or (c) below apply. The Compensation Committee shall determine the repayment schedule for each amount of Erroneously Awarded Compensation in a manner that complies with this “reasonably promptly” requirement. Such determination shall be consistent with any applicable legal guidance by the SEC, Nasdaq, judicial opinion, or otherwise. The determination of “reasonably promptly” may vary from case to case and the Compensation Committee is authorized to adopt additional rules or policies to further describe what repayment schedules satisfy this requirement.
1 NOTE: questions as to “materiality” will be made by the Audit Committee as part of the restatement process. Companies should review the charters for Audit and Compensation committees and consider updates authorizing them to oversee and make applicable determinations under the company’s Clawback policy.
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(a) Erroneously Awarded Compensation need not be recovered if the direct expense paid to a third party to assist in enforcing (or making determinations in connection with the enforcement of) this Policy would exceed the amount to be recovered and the Compensation Committee has made a determination that recovery would be impracticable. Before concluding that it would be impracticable to recover any amount of Erroneously Awarded Compensation based on expense of enforcement, the Company shall (i) make a reasonable attempt to recover such Erroneously Awarded Compensation, (ii) document such reasonable attempt or attempts to recover, and (iii) provide appropriate documentation to the Compensation Committee or Nasdaq, if requested.
(b) Erroneously Awarded Compensation need not be recovered if recovery would violate home country law where that law was adopted prior to November 28, 2022. Before concluding that it would be impracticable to recover any amount of Erroneously Awarded Compensation based on a violation of home country law, the Company shall obtain an opinion of home country counsel, in form an substance that would be reasonably acceptable to Nasdaq, that recovery would result in such a violation and shall provide such opinion to Nasdaq, if requested.
(c) Erroneously Awarded Compensation need not be recovered if recovery would likely cause an otherwise tax-qualified retirement plan, under which benefits are broadly available to employees of the Company, to fail to meet the requirements of 26 U.S.C. 401(a)(13) or 26 U.S.C. 411(a) and the regulations thereunder (as such provision may be amended, modified or supplemented).
6. Compensation Committee Decisions. Decisions of the Compensation Committee with respect to this Policy shall be final, conclusive and binding on all Executive Officers subject to this Policy.
7. No Indemnification. Notwithstanding anything to the contrary in any other policy of the Company or any agreement between the Company and an Executive Officer, no Executive Officer shall be indemnified by the Company against the loss arising from the recovery of any Erroneously Awarded Compensation.
8. Agreement to Policy by Executive Officers. The Company shall take reasonable steps to inform Executive Officers of this Policy and obtain their express agreement to this Policy, which steps may constitute the inclusion of this Policy as an attachment to any award that is accepted by an Executive Officer. This Policy shall be deemed to apply to each employment or grant agreement between the Company or any of its subsidiaries and any Executive Officer subject to this Policy.
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