Kaival Brands Innovations Group, Inc 10-Q for FY2021 Q2
Kaival Brands Innovations Group, Inc. (KAVL)
About this 10-Q
Kaival Brands Innovations Group, Inc filed this 10-Q on June 21, 2021, covering the quarter ended April 30, 2021 (FY2021 Q2).
Headline figures
Quarter ended April 30, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $18.15M
- down 19.4% from $22.51M a year earlier
- Net loss
- $4.26M
- compared with net income of $2.8M a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 2021
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ____________
Commission file number 000-56016
KAIVAL BRANDS INNOVATIONS GROUP, INC.
(Exact name of registrant as specified in its charter)
| DELAWARE | 83-3492907 | |
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
4460 Old Dixie Highway
Grant, Florida 32949
(Address of principal executive offices, including zip code)
(833) 452-4825
(Registrant’s telephone number, including area code)
N/A
(Former name, former address, and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| None | None | None |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ☒ NO ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit such files). YES ☒ NO ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large Accelerated filer | ☐ | Accelerated filer | ☐ |
| Non-accelerated filer | ☒ | Smaller reporting company | ☒ |
| Emerging growth company | ☒ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ☐ NO ☒
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
283,206,612 shares of common stock, $0.001 par value, outstanding as of June 16, 2021
KAIVAL BRANDS INNOVATIONS GROUP, INC.
FORM 10-Q
TABLE OF CONTENTS
i
CAUTIONARY NOTE CONCERNING FORWARD-LOOKING STATEMENTS
Certain statements and information in this Quarterly Report on Form 10-Q for the quarter ended April 30, 2021 (the “Quarterly Report”) may constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical facts, which address activities, events, or developments that we expect or anticipate will or may occur in the future, including such things as future capital expenditures, commencement of business operations, business strategy, statements related to the expected effects on our business from the novel coronavirus (“COVID-19”) pandemic, and other similar matters are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” or “continue,” or other comparable terminology. These forward-looking statements are based largely on our current expectations and assumptions and are subject to a number of risks and uncertainties, many of which are beyond our control. These statements are subject to many risks, uncertainties, and other important factors that could cause actual future results to differ materially from those expressed in the forward-looking statements including, but not limited to, the duration and scope of the COVID-19 pandemic and impact on the demand for the products we distribute; our ability to obtain the products from the manufacturer; actions governments, businesses, and individuals take in response to the pandemic, including mandatory business closures and restrictions on onsite commercial interactions; the impact of the COVID-19 pandemic and action taken in response to the pandemic on global and regional economies and economic activity; the pace of recovery when the COVID-19 pandemic subsides; general economic uncertainty in key global markets and a worsening of global economic conditions or low levels of economic growth; our inability to sustain profitable sales growth; changes in government regulations or laws that affect our business; significant changes in our relationships with our distributor or sub-distributors; and circumstances or developments that may make us unable to implement or realize the anticipated benefits, or that may increase the costs, of our current and planned business initiatives. In light of these risks and uncertainties, all of the forward-looking statements made herein are qualified by these cautionary statements and there can be no assurance that the actual results or developments anticipated by us will be realized. We undertake no obligation to update or revise any of the forward-looking statements contained herein.
ii
Kaival Brands Innovations Group, Inc.
(Unaudited)
| April 30, 2021 | October 31, 2020 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash | $ | 2,140,667 | $ | 7,421,701 | ||||
| Accounts receivable | 18,136,147 | 1,401,562 | ||||||
| Accounts receivable – related parties | 765 | 15,360 | ||||||
| Prepaid expenses | 30,000 | — | ||||||
| Inventories | 28,794,150 | 6,383 | ||||||
| Total current assets | 49,101,729 | 8,845,006 | ||||||
| Right of use asset- operating lease | 62,882 | 70,133 | ||||||
| TOTAL ASSETS | $ | 49,164,611 | $ | 8,915,139 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Accounts payable- related party | $ | 38,001,633 | $ | 1,409,561 | ||||
| Accounts payable- trade | 272,509 | — | ||||||
| Accrued expenses | 1,600,029 | 1,062,105 | ||||||
| Income tax accrual | — | 1,331,856 | ||||||
| Deferred revenue | — | 623,096 | ||||||
| Operating lease obligation – short term | 12,363 | 11,709 | ||||||
| Total current liabilities | 39,886,534 | 4,438,327 | ||||||
| LONG TERM LIABILITIES | ||||||||
| Operating lease obligation, net of current portion | 52,859 | 59,204 | ||||||
| TOTAL LIABILITIES | $ | 39,939,393 | $ | 4,497,531 | ||||
| STOCKHOLDERS’ EQUITY: | ||||||||
| Preferred stock 5,000,000 shares authorized; Series A Convertible Preferred stock ($.001 par value, 3,000,000 shares authorized, 3,000,000 issued and outstanding as of April 30, 2021 and October 31, 2020) | 3,000 | 3,000 | ||||||
| Common stock ($.001 par value, 1,000,000,000 shares authorized, 282,803,708 and 277,282,630 issued and outstanding as of April 30, 2021 and October 31, 2020, respectively) | 282,804 | 277,283 | ||||||
| Additional paid-in capital | 9,114,243 | 364,728 | ||||||
| Retained (deficit) earnings | (174,829 | ) | 3,772,597 | |||||
| Total Stockholders’ Equity | 9,225,218 | 4,417,608 | ||||||
| TOTAL LIABILITIES & STOCKHOLDERS’ EQUITY | $ | 49,164,611 | $ | 8,915,139 | ||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
1
Kaival Brands Innovations Group, Inc.
Consolidated Statements of Operations
(Unaudited)
For the Three Months Ended April 30, | For the Six Months Ended April 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Revenues | ||||||||||||||||
| Revenues | $ | 18,752,086 | $ | 22,473,674 | $ | 56,122,053 | $ | 22,473,674 | ||||||||
| Revenues - related parties | 11,245 | 32,480 | 61,545 | 32,480 | ||||||||||||
| Excise tax on products | (614,252 | ) | — | (673,000 | ) | — | ||||||||||
| Total revenues | 18,149,079 | 22,506,154 | 55,510,598 | 22,506,154 | ||||||||||||
| Cost of revenue | ||||||||||||||||
| Cost of revenue - related party | 11,792,353 | 18,301,800 | 44,271,453 | 18,301,800 | ||||||||||||
| Cost of revenue - other | 70,247 | — | 156,268 | — | ||||||||||||
| Total cost of revenue | 11,862,600 | 18,301,800 | 44,427,721 | 18,301,800 | ||||||||||||
| Gross profit | 6,286,479 | 4,204,354 | 11,082,877 | 4,204,354 | ||||||||||||
| Operating expenses | ||||||||||||||||
| Advertising and Promotion | 800,685 | 259,998 | 1,761,187 | 259,998 | ||||||||||||
| General & Administrative expenses | 9,558,009 | 198,092 | 12,976,348 | 211,025 | ||||||||||||
| Total operating expenses | 10,358,694 | 458,090 | 14,737,535 | 471,023 | ||||||||||||
| Other Income | ||||||||||||||||
Interest income | 46 | — | 376 | — | ||||||||||||
| Total Other Income | 46 | — | 376 | — | ||||||||||||
| Income (loss) before income taxes provision | (4,072,169 | ) | 3,746,264 | (3,654,282 | ) | 3,733,331 | ||||||||||
| Provision for income taxes | (186,758 | ) | (950,431 | ) | (293,144 | ) | (950,431 | ) | ||||||||
| Net income (loss) | $ | (4,258,927 | ) | $ | 2,795,833 | $ | (3,947,426 | ) | $ | 2,782,900 | ||||||
| Net income (loss) per common share - basic and diluted | $ | (0.02 | ) | $ | (0.00 | ) | $ | (0.01 | ) | $ | (0.00 | ) | ||||
| Weighted average number of common shares outstanding - basic and diluted | 282,143,504 | 572,364,574 | 280,424,288 | 572,364,574 | ||||||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
2
Kaival Brands Innovations Group, Inc.
Consolidated Statements of Changes in Stockholders’ Equity
For the Six Months Ended April 30, 2021
(Unaudited)
| Convertible Preferred Shares (Series A) | Par Value Convertible Preferred Shares (Series A) | Common Shares | Par Value Common Shares | Additional Paid-in Capital | Retained Earnings | Total | ||||||||||||||||||||||
| Balances, October 31, 2020 | 3,000,000 | $ | 3,000 | 277,282,630 | $ | 277,283 | $ | 364,728 | $ | 3,772,597 | $ | 4,417,608 | ||||||||||||||||
| Issuance of common shares for employee compensation | — | — | 535,000 | 535 | 76,165 | — | 76,700 | |||||||||||||||||||||
| Common shares settled and cancelled | — | — | (211,500 | ) | (212 | ) | (30,299 | ) | — | (30,511 | ) | |||||||||||||||||
| Issuance of common shares for compensation | — | — | 2,065,547 | 2,066 | 1,032,530 | — | 1,034,596 | |||||||||||||||||||||
| Net income | — | — | — | — | — | 311,501 | 311,501 | |||||||||||||||||||||
| Balances, January 31, 2021 | 3,000,000 | $ | 3,000 | 279,671,677 | $ | 279,672 | $ | 1,443,124 | $ | 4,084,098 | $ | 5,809,894 | ||||||||||||||||
| Issuance of common shares for employee compensation | — | — | 775,000 | 775 | 646,686 | — | 647,461 | |||||||||||||||||||||
| Common shares settled and cancelled | — | — | (246,055 | ) | (246 | ) | (47,218 | ) | — | (47,464 | ) | |||||||||||||||||
| Issuance of common shares for compensation | — | — | 2,603,086 | 2,603 | 6,491,952 | — | 6,494,555 | |||||||||||||||||||||
| Stock option expense | — | — | — | — | 579,699 | — | 579,699 | |||||||||||||||||||||
| Net income | — | — | — | — | — | (4,258,927 | ) | (4,258,927 | ) | |||||||||||||||||||
| Balances, April 30, 2021 | 3,000,000 | $ | 3,000 | 282,803,708 | $ | 282,804 | $ | 9,114,243 | $ | (174,829 | ) | $ | 9,225,218 | |||||||||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
3
| Kaival Brands Innovations Group, Inc. |
| Consolidated Statements of Changes in Stockholders’ Deficit |
| For the Six Months Ended April 30, 2020 |
(Unaudited)
Convertible Preferred Shares (Series A) | Par Value Convertible Preferred Shares (Series A) | Common Shares | Par Value Common Shares | Additional Paid-in Capital | Accumulated Deficit | Total | ||||||||||||||||||||||
| Balances, October 31, 2019 | — | $ | — | 572,364,574 | $ | 572,365 | $ | (544,026 | ) | $ | (73,225 | ) | $ | (44,886 | ) | |||||||||||||
| Expenses paid on behalf of the Company and contributed to capital | — | — | — | — | 26,457 | — | 26,457 | |||||||||||||||||||||
| Net loss | — | — | — | — | — | (12,933 | ) | (12,933 | ) | |||||||||||||||||||
| Balances, January 31, 2020 | — | — | 572,364,574 | 572,365 | (517,569 | ) | (86,158 | ) | (31,362 | ) | ||||||||||||||||||
| Expenses paid on behalf of the Company and contributed to capital | — | — | — | — | 700 | — | 700 | |||||||||||||||||||||
| Net profit | — | — | — | — | — | 2,795,833 | 2,795,833 | |||||||||||||||||||||
| Balances, April 30, 2020 | — | $ | — | 572,364,574 | $ | 572,365 | $ | (516,869 | ) | $ | 2,709,675 | $ | 2,765,171 | |||||||||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
4
Kaival Brands Innovations Group, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
| For the Six Months Ended April 30, 2021 | For the Six Months Ended April 30, 2020 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net (loss) income | $ | (3,947,426 | ) | $ | 2,782,900 | |||
| Adjustment to reconcile net (loss) income to net cash provided by operating activities: | ||||||||
| Stock based compensation | 8,253,312 | — | ||||||
| Stock option expense | 579,699 | |||||||
| ROU operating lease expense | 7,905 | — | ||||||
| Expenses contributed to capital | — | 27,157 | ||||||
| Changes in current assets and liabilities: | ||||||||
| Accounts receivable | (16,734,585 | ) | (3,213,920 | ) | ||||
| Accounts receivable – related parties | 14,595 | (5,070 | ) | |||||
| Inventories | (28,787,767 | ) | (16,419 | ) | ||||
| Prepaid expenses | (30,000 | ) | ||||||
| Deferred revenue | (623,096 | ) | — | |||||
| Payments on operating lease liability | (6,345 | ) | — | |||||
| Accounts payable – related party | 36,592,072 | 1,259,145 | ||||||
| Accounts payable | 272,509 | 19,493 | ||||||
| Accrued taxes | (756,078 | ) | — | |||||
| Accrued expenses | (37,854 | ) | 1,117,396 | |||||
| Net cash (used in) provided by operating activities | (5,203,059 | ) | 1,970,682 | |||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Settled RSU shares with cash | $ | (77,975 | ) | $ | — | |||
| Cash flows used in financing activities | (77,975 | ) | — | |||||
| Net change in cash | $ | (5,281,034 | ) | $ | 1,970,682 | |||
| Beginning cash balance | 7,421,701 | — | ||||||
| Ending cash balance | $ | 2,140,667 | $ | 1,970,682 | ||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||
| Interest paid | $ | — | $ | — | ||||
| Income taxes paid | $ | — | $ | — | ||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
5
KAIVAL BRANDS INNOVATIONS GROUP, INC.
Notes to Unaudited Consolidated Financial Statements
Note 1 – Organization and Description of Business
Kaival Brands Innovations Group, Inc. (the “Company,” the “Registrant,” “we,” “us,” or “our”), formerly known as Quick Start Holdings, Inc., was incorporated on September 4, 2018 in the State of Delaware.
Description of Business
The Company is focused on growing and incubating innovative and profitable products into mature, dominant brands. In March 2020, the Company commenced business operations as a result of becoming the exclusive distributor of certain electronic nicotine delivery systems and related components (the “Products”) manufactured by Bidi Vapor, LLC, a Florida limited liability company (“Bidi”), a related party company that is also owned by Nirajkumar Patel, the Chief Executive Officer and Chief Financial Officer of the Company.
On March 9, 2020, the Company entered into an exclusive distribution agreement (the “Distribution Agreement”) with Bidi, a related party company, which Distribution Agreement was amended and restated on May 21, 2020 and again on April 20, 2021 (collectively the “A&R Distribution Agreement”) in order to clarify some of the provisions. Pursuant to the A&R Distribution Agreement, Bidi granted the Company an exclusive worldwide right to distribute the Products for sale and resale to both retail level customers and non-retail level customers. Currently, the Products consist primarily of the “Bidi Stick” and, once launched, the “Bidi Pouch”.
In connection with the A&R Distribution Agreement, the Company entered into non-exclusive sub-distribution agreements, some of which were subsequently amended and restated by the parties in order to clarify certain provisions (all such agreements, as amended and restated, are collectively referred to as the “A&R Sub-Distribution Agreements”), whereby the Company appointed the counterparties as non-exclusive sub-distributors. Pursuant to the A&R Sub-Distribution Agreements, the sub-distributors agreed to purchase for resale the Products in such quantities as they should need to properly service non-retail customers within the continental United States (the “Territory ”).
On August 31, 2020, the Company formed Kaival Labs, Inc., a Delaware corporation (herein referred to as “Kaival Labs”), as a wholly owned subsidiary of the Company.
6
Recent Developments
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.
Our operations have not been significantly impacted. No impairments have been recorded and no triggering events or changes in circumstances had occurred. While the spread of COVID-19 has begun to slow and social restrictions have begun to ease, the full impact of the COVID-19 pandemic continues to evolve and remains uncertain. As such, the full magnitude of the COVID-19 pandemic, and the resulting impact, if any, on the Company’s financial condition, liquidity, and future results of operations is uncertain. Management is actively monitoring the global situation on our financial condition, liquidity, operations, suppliers, industry, and customers. Reduced demand for products or impaired ability to meet customer demand (including as a result of disruptions at the Company’s suppliers) could have a material adverse effect on its business operations and financial performance. Given the daily evolution of the COVID-19 pandemic and the global responses to curb its spread, the Company is not presently able to estimate the effects of the COVID-19 pandemic on its results of operations, financial condition, or liquidity for the current fiscal year. As of the date of this filing, the Company’s recently commenced business operations have not been materially impacted, however, we have encountered some logistical delays related to product launches and distribution in international markets.
Note 2 – Basis of Presentation and Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the financial statements of the Company’s wholly-owned subsidiary, Kaival Labs. Intercompany transactions are eliminated.
7
Basis of Presentation
The accompanying unaudited interim consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and the rules of the Securities and Exchange Commission (“SEC”) and should be read in conjunction with the audited financial statements and notes thereto contained in the Company’s most recent Annual Financial Statements filed with the SEC on Annual Report on Form 10-K on February 12, 2021 (the “2020 Annual Report”). In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim period presented have been reflected herein. The results of operations for the interim period are not necessarily indicative of the results to be expected for the full year. Notes to the consolidated financial statements, which would substantially duplicate the disclosures contained in the audited financial statements for the most recent fiscal period, as reported in the 2020 Annual Report have been omitted.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. In the opinion of management, all adjustments necessary in order to make the financial statements not misleading have
been included. Actual results could differ from those estimates.
Share-Based Compensation
The Company measures the cost of services received in exchange for an award of equity instruments (share-based payments, or SBP) based on the grant-date fair value of the award. That cost is recognized over the period during which a recipient is required to provide service in exchange for the SBP award—the requisite service period (vesting period). For SBP awards subject to conditions, compensation is not recognized until the performance condition is probable of occurrence. The grant-date fair value of share options is estimated using the Black-Scholes-Merton option-pricing model. Compensation expense for SBP awards granted to nonemployees is remeasured each period as the underlying options vest.
The fair value of each option granted during the period ended April 30, 2021 and 2020 was estimated on the date of grant using the Black-Scholes-Merton option-pricing model with the weighted average assumptions in the following table:
| 2021 | 2020 | |||||||
| Expected dividend yield | 0 | % | — | |||||
| Expected option term (years) | 10 | — | ||||||
| Expected volatility | 301.53 | % | — | |||||
| Risk-free interest rate | 1.62 | % | — |
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 Company’s common stock. The assumed discount rate was the default risk-free five-year interest rate for US Treasury bills.
8
Revenue Recognition
The Company adopted ASC 606, Revenue from Contracts with Customers (Topic 606) (“ASC 606”), in the second quarter of fiscal year 2020, as this was the first quarter that the Company generated revenues. Under ASC 606, the Company recognizes revenue when a customer obtains control of promised goods, in an amount that reflects the consideration that the Company expects to receive in exchange for the goods. To determine revenue recognition for arrangements within the scope of ASC 606, the Company performs the following five steps: (1) identify the contracts with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when or as the entity satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods it transfers to the customer. In addition, the Company accounts for rebates and volume discounts that customers will be using to purchase products in the future.
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 sales periodically.
Note 3 – Leases
The Company capitalizes all leased assets pursuant to ASU 2016-02, “Leases (Topic 842),” which requires lessees to recognize right-of-use assets and lease liability, initially measured at present value of the lease payments, on its balance sheet for leases with terms longer than 12 months and classified as either financing or operating leases. The Company does not have financing leases and only one operating lease for office space. The operating lease is for a term of five years, beginning August 1, 2020, with rent of $1,000 payable monthly. As the operating lease does not provide for an implicit interest rate, we estimated a current borrowing rate of 4.5% in determining the present value of the lease. As of April 30, 2021, the right-to-use (“ROU”) lease asset, net of accumulated amortization, was $62,882. The initial recognition of the ROU operating lease was $73,749 for both the ROU asset and ROU liability. The amortization expense for ROU asset for the twelve months ended October 31, 2020 was $3,616 and one payment on the ROU liability was $2,836. The amortization expense for the six months ended April 30, 2021 was $7,905 and two payments on the ROU liability were $6,345. At April 30, 2021, short-term ROU lease liability was $12,363 and long-term liability was $52,859, totaling $65,222. Operating lease expense totaling $9,000 for November 1, 2020 until April 2021 was accrued at April 30, 2021.
| 2020 | 2021 | 2022 | 2023 | 2024 | Total | |||||||||||||||||||
| Lease payments | $ | 12,300 | $ | 13,500 | $ | 15,300 | $ | 18,000 | $ | 13,500 | $ | 72,600 | ||||||||||||
| Less discount | (7,378 | ) | ||||||||||||||||||||||
| Present value of future payments | 65,222 | |||||||||||||||||||||||
| Less current obligations | (12,363 | ) | ||||||||||||||||||||||
| Long term lease obligations | $ | 52,859 | ||||||||||||||||||||||
9
Note 4 – Stockholder Equity
Preferred Shares Issued
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 Preferred Stock (the “Series A Preferred Stock”). Each share of the Series A Preferred Stock are initially convertible into 100 shares of common stock. All 3,000,000 shares of Series A Preferred Stock were issued and outstanding as of April 30, 2021.
Common Shares Issued
The authorized common stock of the Company consists of 1,000,000,000 shares with a par value of $0.001. There were 282,803,708 shares of common stock issued and outstanding as of April 30, 2021.
Restricted Stock Unit Awards
During the six months ended April 30, 2021, 1,310,000 shares of common stock were issued to eight employees of the Company pursuant to restricted stock unit (“RSU”) agreements, resulting in $724,161 of share-based compensation. Of the shares issued to employees, 457,555 shares were withheld by the Company to satisfy tax withholding obligations equal to $77,975.
During the six months ended April 30, 2021, 4,668,633 shares of common stock were issued to 7 non-employee vendors as compensation for professional services rendered to the Company and two officers as additional compensation. These shares were expensed to the Company using the closing share price on the share issue dates to compute an aggregate fair market value total of $7,529,151.
Stock Options
During the six months April 30, 2021, the Company granted 1,100,000 options of which 500,000 fully vest on December 1, 2021,180,000 fully vest on March 15, 2021 and 140,000 vest over the next 3 years on March 15, 2022, 2023 and 2024. The options have exercise prices ranging from $2.165 to $2.39 per share. These options have a weighted average remaining life of 9.88 years as of April 30, 2021 and expire in the year 2031. The aggregate intrinsic value of these outstanding options as of April 30, 2021 was $0.
The Company fair valued the options on the grant date at $2,438,996 using a Black-Scholes option pricing model with the following assumptions: stock price range of $2.165-2.28 per share (based on the quoted trading price on the date of grant), volatility of 301.53%, expected term of 10 years, and a risk-free interest rate of 1.62%. The Company is amortizing the expense over the vesting terms of each. The total stock option expense for the six months April 30, 2021 was $579,699.
Note 5 – Related-Party Transactions
Revenue and Accounts Receivable
During the six months ended April 30, 2021, the Company recognized revenue of $61,545 from three companies owned by Nirajkumar Patel, the Chief Executive Officer and Chief Financial Officer of the Company, and/or his wife. As of April 30, 2021, the Company has accounts receivable from this related party in the amount of $765.
Purchases and Accounts Payable
During the six months ended April 30, 2021, the Company purchased Products equal to $75,065,602 from Bidi, a related party company that is also owned by Nirajkumar Patel, the Company’s Chief Executive Officer and Chief Financial Officer. As of April 30, 2021, the Company had accounts payable to Bidi of $38,001,633 and products valued at $28,791,150 were held in inventory at April 30, 2021.
Office Space
On August 1, 2020, the Company began leasing office space for its main corporate office in Grant, Florida. The five-year lease agreement is with a related party, Just Pick, LLC (“Just Pick”). The Company’s Chief Executive Officer is an officer of Just Pick.
Prior to this, the Company utilized the home office space and warehouse of its management at no cost through July 31, 2020.
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Note 6 - Concentrations
Financial instruments, which potentially subject the Company 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 six months ended April 30, 2021, 100% of the inventories of Products, primarily consisting of the “Bidi Stick,” were purchased from Bidi, a related party company that is also owned by Nirajkumar Patel, the Company’s Chief Executive Officer and Chief Financial Officer, in the amount of $75,065,602. It also accounted for 99.3% of the total accounts payable as of April 30, 2021. Products valued at $28,791,150 were held in inventory at April 30, 2021.
Concentration of Revenues and Accounts Receivable
For the six months ended April 30, 2021, approximately 33%, or $18,129,136, of the revenue from the sale of Products, primarily consisting of the “Bidi Stick,” was generated from Favs Business LLC (“Favs Business”), approximately 16%, or $9,069,455, of the revenue from the sale of Products was generated from MMS Distributing, LLC (“MMS Distro”), approximately 12%, or $6,820,132, of the revenue from the sale of Products was generated from Lakshmi Distributing Inc., doing business as C Store Master (“C Store Master”) and approximately 11%, or $5,868,000, of the revenue from the sale of Products was generated by GPM Investment, LLC (“GPM Investment”).
Favs Business, and GPM Investment had outstanding balances of $8,590,200 and $2,482,553, respectively, accounted for approximately 47% and 14%, respectively, of the total accounts receivable from customers as of April 30, 2021.
Note 7 – Commitments and Contingencies
The Company follows ASC 450-20, Loss Contingencies, to report accounting for contingencies. Liabilities for loss contingencies arising from claims, assessments, litigation, fines and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment can be reasonably estimated. There were no commitments or contingencies as of April 30, 2021 and April 30, 2020 other than the below:
On May 28, 2020, the Board of Directors approved cash bonus awards to each of the Company’s Chief Executive Officer and its Chief Operating Officer. With respect to the Chief Executive Officer, the Board of Directors approved a cash bonus award equal to $30,000 for every $25 million in gross revenues generated by the Company. With respect to the Chief Operating Officer, the Board approved a cash bonus award equal to $20,000 for every $25 million in gross revenues generated by the Company. On May 28, 2020, the Board of Directors also approved an equity bonus award for each of the Chief Executive Officer and the Chief Operating Officer. With respect to the Chief Executive Officer, the Board of Directors approved an award of 90,000 restricted shares of the Company’s common stock for every $50 million in accumulated gross revenues generated by the Company. With respect to the Chief Operating Officer, the Board approved an award of 75,000 restricted shares of the Company’s common stock for every $50 million in accumulated gross revenues generated by the Company. The Company’s accumulated gross revenues will be evaluated on a quarterly basis, beginning with the second quarter of fiscal year 2020. At October 31, 2020, the Company determined that the fair value of the equity bonus shares, or $165,000, should be accrued as it was deemed likely that the $50 million revenue target would be met. The Company issued these shares to the Chief Executive Officer and Chief Operating Office on January 1, 2021. During the quarter ended January 31, 2021, the $75 million and $100 million accumulated revenue targets were both achieved and the Company determined that the fair market value of the 165,000 shares, or $70,785, and the cash bonuses totaling $100,000 should be accrued at January 31, 2021.
During the three and six months ended April 30, 2021 additional revenue targets were not achieved and no related bonuses were accrued.
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On March 31, 2020, the Company entered into a service agreement (the “Service Agreement”) with QuikfillRx LLC, a Florida limited liability company (“QuikfillRx”), whereby QuikfillRx provides the Company with certain services and support relating to sales management, website development and design, graphics, content, public communication, social media, management and analytics, and market and other research (collectively, the “Services”). The Services are provided by QuikfillRx as requested from time to time by the Company.
On June 2, 2020, the Company entered into the First Amendment to the Service Agreement (the “First Amendment” and, collectively with the Service Agreement, the “Amended Service Agreement”) with QuikfillRx. Effective as of March 16, 2021, the Company entered into the Second Amendment to Service Agreement (the “Second Amendment” and, collectively with the Amended Service Agreement, the “Further Amended Service Agreement”) with QuikfillRx. Pursuant to the terms of the Further Amended Service Agreement, the parties agreed to the following “General Compensation” payments: (i) for the Services provided in March 2020, the Company paid QuikfillRx an amount equal to $86,000; (ii) for the Services provided in April 2020, the Company paid QuikfillRx an amount equal to $100,000; (iii) each calendar month commencing May 2020 through October 2020, the Company paid QuikfillRx an amount equal to $125,000 per month for the Services to be performed during such calendar month; (iv) for each calendar month between November 1, 2020 and October 31, 2021, the Company will pay QuikfillRx $125,000 per month for the Services to be performed during such calendar month; (iv) if the parties agree to extend the term of the Further Amended Service Agreement beyond October 31, 2021, then for the period between November 1, 2021 and October 31, 2022, the Company will pay QuikfillRx $150,000 per month for the Services to be performed during such calendar month; and (v) if the parties agree to extend the term of the Further Amended Service Agreement beyond October 31, 2022, then for the period between November 1, 2022 and October 31, 2021, the Company will pay QuikfillRx $150,000 per month for the Services to be performed during such calendar month. 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. |
The Company has accrued $212,345 for a quarterly bonus payable to QuikfillRx, based on the Applicable Gross Quarterly Sales results of the three months ended April 30, 2021.
On March 17, 2021 the Company entered into a consulting agreement with Russell Quick which granted stock options to purchase 500,000 shares of the Company’s common stock in exchange for consulting services. Mr. Quick may exercise the option right on December 1, 2021 when the shares are fully vested. The exercise price per share is $2.39. The Company recognized $190,000 in expense to account for the stock options. Russell Quick is the manager of QuikfillRx.
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Note 8 – Income Tax
The Company is subject to federal income taxes and state income tax in the United States. 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 35% to 21%, eliminated corporate Alternative Minimum Tax, modified rules for expensing capital investment, and limited the deduction of interest expense for certain companies. The Company fulfilled and shipped all of the Products from Florida and, thus, it is subject to the state corporate income tax of Florida with a tax rate of 4.458%.
During the six months ended April 30, 2021, the Company generated no taxable income and, thus no federal or state income taxes are accrued for tax year 2021.
Significant components of the Company’s deferred tax assets and liabilities as of April 30, 2021 and October 31, 2020 after applying enacted corporate income tax rate, is net operating loss carryforward of $0 and $15,377, and a valuation allowance of $0 and $15,377, respectively, which is a total deferred tax asset of $0. The Company’s tax returns for 2018 and 2019 remain open to examination.
Note 9 – Subsequent Events
Patent Contribution Agreement
On May 4, 2021, Next Generation Labs, LLC (“Next Generation”) notified the Company that a “reversion event” had occurred under that certain Patent Contribution Agreement, dated September 28, 2020 (the “Patent Contribution Agreement”). Pursuant to the Patent Contribution Agreement, Next Generation agreed to contribute certain patents, patent applications, and patent data, described on Exhibit “A” of the Patent Contribution Agreement (the “Patents”), to the Company and the Company would subsequently transfer the Patents to Kaival Labs.
Pursuant to the Patent Contribution Agreement, the Company agreed to pay Next Generation a purchase price of $3 million for the Patents (the “Purchase Price”), which was expected to be paid over-time upon two events. First, the Company expected to pay part of the Purchase Price from proceeds generated from a future securities offering (the “Offering Payment”). Additionally, on the first date that Kaival Labs sold a product that was developed using any portion of the Patents or based on the Patents, the Company agreed to pay Next Generation the difference between the Purchase Price and the Offering Payment.
Pursuant to the terms of the Patent Contribution Agreement, the parties agreed that the Company would file a Form 1-A offering statement no later than January 31, 2021, unless extended in writing by the Company in good faith to no later than March 15, 2021 (the “Filing Date”). The Patent Contribution Agreement further provided that in the event the Company or Kaival Labs materially breached the terms of the Patent Contribution Agreement and the material breach is not cured within fifteen (15) business days after Next Generation provides written notice of such material breach, then a reversion event would occur, and the Patents would revert from Kaival Labs to Next Generation.
The Company did not undertake a securities offering by filing a Form 1-A offering statement by the Filing Date. The Company attempted to negotiate an amendment to the Patent Contribution Agreement, which would allow the Company additional time to undertake a securities offering. However, on April 8, 2021, Next Generation notified the Company that it was in material breach of the Patent Contribution Agreement and that the Company would have fifteen (15) business days, or April 30, 2021, to cure such breach. Ultimately, the Company decided not to cure such breach within the requisite time and, on May 4, 2021, Next Generation notified the Company that a reversion event occurred.
The Company is in the process of completing the necessary documentation to transfer the Patents from Kaival Labs to Next Generation. Neither the Company, nor Kaival Labs, has developed or otherwise relied on the Patents to date and does not expect the reversion of the Patents to materially affect the Company’s business.
Share-based Compensation
On May 5, 2021, 775,000 shares of common stock were issued to eight employees of the Company pursuant to RSU agreements, resulting in the recognition of $487,514 of share-based compensation. Of the shares issued to employees, 372,096 shares were withheld by the Company to satisfy tax withholding obligations equal to $123,536 .
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s Discussion and Analysis of Financial Condition and Results of Operations is designed to provide a reader of the financial statements with a narrative report on our financial condition, results of operations, and liquidity. This discussion and analysis should be read in conjunction with the unaudited Financial Statements and notes thereto for the three and six months ended April 30, 2021 included under Item 1 – Financial Statements in this Quarterly Report and our audited Financial Statements and notes thereto for the year ended October 31, 2020 contained in our Annual Report on Form 10-K. The following discussion contains forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations, and intentions. Our actual results could differ materially from those discussed in the forward-looking statements. Please also see the cautionary language at the beginning of this Quarterly Report regarding forward-looking statements.
The discussions of our results as presented in this Quarterly Report include use of the non-GAAP term “gross profit.” Gross profit is determined by deducting the cost of goods sold from operating revenue. Cost of goods sold includes direct and indirect labor, materials, services, fixed costs, and variable overhead. Gross profit should not be considered an alternative to operating income or net income, which are determined in accordance with GAAP. We believe that gross profit, although a non-GAAP financial measure, is useful and meaningful to investors as a basis for making investment decisions. It provides investors with information that demonstrates our cost structure and provides funds for our total costs and expenses. We use gross profit in measuring the performance of our business. Other companies may calculate gross profit in a different manner.
Potential Impact of COVID-19
In March 2020, the WHO declared the outbreak of COVID-19 as a pandemic based on the rapid increase in global exposure. COVID-19 continues to spread throughout the world, including the United States. Our business operations, which commenced during this pandemic, continue to be operational and, to date, we have not seen any significant direct negative impact of COVID-19 to our newly commenced business. However, we have encountered some logistical delays related to product launches and distribution in international markets due to COVID-19 While the spread of COVID-19 has begun to slow and social restrictions have begun to ease, the full impact of the COVID-19 pandemic continues to evolve and remains uncertain. The COVID-19 pandemic continues to impact economic conditions, which could impact the short-term and long-term demand from our customers and, therefore, has the potential to negatively impact our results of operations, cash flows, and financial position in the future. Management is actively monitoring this situation and any impact on our financial condition, liquidity, and results of operations. However, given the daily evolution of the COVID-19 pandemic and the global responses to curb its spread, we are not presently able to estimate the effects of the COVID-19 pandemic on our future results of operations, financial condition, or liquidity for the remainder of fiscal year 2021 and, possibly, beyond.
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Corporate History
We were incorporated on September 4, 2018 in the State of Delaware. We are focused on growing and incubating innovative and profitable products into mature, dominant brands.
USSE Corp. and USSE Delaware Merger
USSE Corp., a Nevada corporation (“USSE Nevada”) was incorporated with the Nevada Secretary of State on July 8, 1998 under the original name C&A Restaurants, Inc. (“C&A Restaurants”). On June 15, 2009, C&A Restaurants changed its name to USSE Corp.
Effective September 19, 2018, USSE Nevada re-domiciled from Nevada to Delaware pursuant to a merger of USSE Nevada with and into USSE Delaware, Inc. (“USSE Delaware”), with USSE Delaware as the surviving entity.
Holding Company Reorganization
On September 4, 2018, USSE Delaware acquired 1,000 shares of our common stock, which represented 100% of our then-outstanding shares of common stock, for no consideration, resulting in us becoming a wholly-owned subsidiary of USSE Delaware. Also, immediately prior to the Holding Company Reorganization (as defined below), USSE Merger Sub, Inc., a Delaware corporation (“USSE Merger Sub”), was our wholly-owned subsidiary.
On September 19, 2018, and in accordance with the provisions set forth in Section 251(g) of the Delaware General Corporation Law, USSE Merger Sub, an indirect wholly-owned subsidiary of USSE Delaware and our direct wholly-owned subsidiary, merged with and into USSE Delaware, our then-parent. USSE Delaware was the surviving corporation and our wholly-owned subsidiary. USSE Delaware also changed its name to USSE Corp. following this holding company reorganization.
Change of Control
On February 6, 2019, we entered into a Share Purchase Agreement (the “Share Purchase Agreement”), by and among us, GMRZ Holdings LLC, a Nevada limited liability company (“GMRZ”), our then-controlling stockholder, and Kaival Holdings, LLC, a Delaware limited liability company (“KH”), pursuant to which, on February 20, 2019, GMRZ sold 504,000,000 shares of our restricted common stock, representing approximately 88.06 percent of our then issued and outstanding shares of common stock, to KH, and KH paid GMRZ consideration in the amount set forth in the Share Purchase Agreement. The consummation of the transactions contemplated by the Share Purchase Agreement resulted in a change in control, with KH becoming our largest controlling stockholder. Nirajkumar Patel and Eric Mosser are the sole voting members of KH.
Name Change
Effective July 12, 2019, we changed our corporate name from Quick Start Holdings, Inc. to Kaival Brands Innovations Group, Inc. The name change was effected through a parent/subsidiary short-form merger of Kaival Brands Innovations Group, Inc., our wholly-owned Delaware subsidiary formed solely for the purpose of the name change, with and into us. We were the surviving entity.
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Share Cancellation and Exchange Agreement
On August 19, 2020, we entered into a Share Cancellation and Exchange Agreement (the “Exchange Agreement”) with our controlling stockholder, KH. Nirajkumar Patel and Eric Mosser, our current officers and directors, are the only voting members of KH. Pursuant to the Exchange Agreement, KH returned to us 300,000,000 shares of our common stock (the “Cancellation Shares”), which were cancelled and retired by us.
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 of Series A Preferred Stock.
In exchange for the Cancellation Shares, we issued 3,000,000 shares (the “Preferred Shares”) of our newly designated Series A Preferred Stock to KH. The exchange of the Cancellation Shares and the issuance of the Preferred Shares is intended to comply with Section 3(a)(9) of the Securities Act of 1933, as amended (the “Act”), in that the issuance is 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.
Our Business
Currently, we market and place the Products into national distribution channels through long-standing industry relationships in accordance with the A&R Distribution Agreement entered into with Bidi, a related party, in March 2020 (and subsequently amended and restated in May 2020 and again in April 2021). Pursuant to the A&R Distribution Agreement, we sell and resell the Products to both retail level customers and non-retail level customers. Bidi’s primary product is the “Bidi Stick” and, once launched, the “Bidi Pouch.” Bidi is considered a related party to us because our Chief Executive Officer, Chief Financial Officer, and director, Mr. Nirajkumar Patel, owns and controls Bidi. Mr. Patel is also a beneficial owner of KH, the entity that is our largest controlling stockholder. Thus, Bidi and we are under common control.
We process all sales made to retail customers and non-retail customers, with all sales to retail customers historically made through the website, www.bidivapor.com; however, we recently engaged goPuff who will handle sales to retail customers going forward. We provide all customer service and support at our own expense. Bidi sets the minimum prices for all sales made by us. With respect to sales to non-retail customers, we submit purchase orders to Bidi, Bidi delivers the Products to us, and we ship the Products directly to these non-retail customers. In the case of retail customers, we maintain adequate inventory levels of the Products in order to meet these customers’ demand, and deliver the Products sold to these retail customers. Pursuant to the terms of the A&R Distribution Agreement, Bidi provides us with all branding, logos, and marketing materials to be utilized by us in connection with our marketing and promotion of the Products.
In connection with the A&R Distribution Agreement, we entered into the A&R Sub-Distribution Agreements with certain counterparties, pursuant to which we appointed such counterparties as non-exclusive sub-distributors of the Products to non-retail customers within the Territory. Each of the A&R Sub-Distribution Agreements set forth certain minimum purchase obligations.
We believe that over the course of the next twelve months, our business operations will generate the capital needed to achieve our business objectives; however, there can be no assurance that our business operations will continue to generate the cash flows required for us to achieve our business objectives. If we require additional capital, there can be no assurance that we will be able to raise any required capital or that capital will be available to us at acceptable terms, or at all. We believe that our cash provided by operations will be sufficient for the next twelve months.
As a result of the commencement of business operations, in March 2020, we began hiring employees and intend to hire additional independent contractors and/or employees in the future. We cannot provide any assurance as to the timing of the hiring of any additional independent contractors or employees, the number of independent contractors or employees that we may hire, and whether acceptable independent contractors or employees will be available to us at that time.
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Liquidity and Capital Resources
We have no known demands or commitments and are not aware of any events or uncertainties as of April 30, 2021 that will result in or that are reasonably likely to materially increase or decrease our current liquidity.
At April 30, 2021, we had working capital of approximately $9.2 million and total cash of approximately $2.1 million.
Now that we have commenced business operations, we intend to generally rely on cash from operations and equity and debt offerings, to the extent necessary and available, to satisfy our liquidity needs. There are a number of factors that could result in the need to raise additional funds, including a decline in revenue or a lack of anticipated sales growth and increased costs. Our efforts are directed toward generating positive cash flow and profitability. If these efforts are not successful, we may need to raise additional capital. Should capital not be available to us at reasonable terms, other actions may become necessary in addition to cost control measures and continued efforts to increase sales. These actions may include exploring strategic options for the sale of the Company, the creation of joint ventures or strategic alliances under which we will pursue business opportunities, or other alternatives. We believe we have the financial resources to weather any short-term impacts of COVID-19; however, we are unable to presently estimate any potential future impacts from COVID-19 and an extended impact could have a material and adverse effect on our sales, earnings, and liquidity.
Cash Flows:
Cash flow used in operations was approximately $5.2 million for the first six months of fiscal year 2021, compared to $1.9 million provided by operations for the first six months of fiscal year 2020. The decrease in cash flow from operations for the first six months of fiscal year 2021 was mainly due to the net loss during the first six months of fiscal year 2021 as compared to the net profit during the comparable period for fiscal 2020. We anticipate improvement in our cash flows provided by operations in future years based on the minimum purchase obligations set forth in the A&R Sub-Distribution Agreements, partially offset by increases in costs as we ramp up our sales and marketing efforts. Cash flow used in financing activities was approximately $77,975 for the first six months of fiscal year 2021, compared to $0 for the first six months of fiscal year 2020. The cash used in financing activities for the first two quarters of fiscal year of 2021 consisted of the settlement of RSUs for cash.
Three months ended April 30, 2021, compared to three months ended April 30, 2020
Revenues:
Revenues for the second quarter of fiscal year 2021 were approximately $18.1 million, compared to $22.5 million in the same period of the prior fiscal year. During the second quarter of fiscal year 2020, we entered into the A&R Distribution Agreement, pursuant to which we were granted the exclusive, worldwide right to distribute the Products. In connection therewith, we entered into the A&R Sub-Distribution Agreements and other agreements with counterparties and granted such sub-distributors the right to distribute the Products to non-retail customers within the Territory. We have continued to enter into additional A&R Sub-Distribution Agreements, thereby increasing our distribution of the Products and, ultimately, we expect our revenues to increase during the remainder of the current fiscal year. We recognize revenue when a customer obtains control of promised goods. In some cases, we provide customers with 120-day payment terms, with the ability for a full refund for products not sold during that 120-day period. During such periods the risk of loss on the products delivered remains with the Company. In such case, the customer typically obtains control on the products when the customer purchases and ships the product to their customer or pays the Company for the product.
Cost of Revenue and Gross Profit:
Gross profit in the second quarter of fiscal year 2021 was approximately $6.3 million, compared to $4.2 million for the second quarter of fiscal year 2020. Total cost of revenue was approximately $11.9 million for the second quarter of fiscal year 2021, compared to $18.3 million for the second quarter of fiscal year 2020. The increase in gross profit is entirely driven by the decrease in the cost of the Products sold in fiscal year 2021 as compared to the previous year.
Operating Expenses:
Total operating expenses were approximately $10.4 million for the second quarter of fiscal year 2021, compared to approximately $458,000 for the second quarter of fiscal year 2020. For the second quarter of fiscal year 2021, operating expenses consisted of commissions paid pursuant to the Further Amended Service Agreement of approximately $801,000 and general and administrative expenses of approximately $9.6 million . General and administrative expenses in the second quarter of fiscal year 2021 consisted primarily of legal fees, salaries, other professional fees, merchant fees, and other service fees. The increase in general and administrative expenses is mostly attributable to the expense related to the issuance of 2,000,000 shares of common stock as compensation for investor relations consulting services. Total operating expenses for the second quarter of fiscal 2020 were approximately $458,000, which included approximately $260,000 in commissions paid pursuant to the Further Amended Service Agreement.
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Income Taxes:
During the second quarter of fiscal year 2021, we expensed approximately $186,800 for prior year income taxes, compared to the accrual of income taxed of approximately $950,400 for the second quarter of fiscal year 2020. The decrease in the accrual for income taxes is as a result of having no taxable income during fiscal year 2021, as compared to the previous fiscal year. Please refer to Note 8, Income Tax, in the Notes to the Consolidated Financial Statements in this Quarterly Report for additional information related to our income taxes.
Net Income (Loss):
Net loss for the second quarter of fiscal year 2021 was approximately $4.3 million, or $(0.02) basic and diluted earnings per share, compared to net income of approximately $2.8 million, or $0.00 basic and diluted earnings per share, for the second quarter of fiscal year 2020. The decrease in net income for the second quarter of fiscal year 2021, as compared to the second quarter of fiscal year 2020, is attributable to the increase in operating expenses and commissions and the decrease in revenues.
Weighted-average common stock shares outstanding were 282,143,504 in the second quarter of fiscal year 2021 and 572,364,574 for the second quarter of fiscal year 2020.
Six months ended April 30, 2021, compared to six months ended April 30, 2020
Revenues:
Revenues for the second quarter of fiscal year 2021 were approximately $18.1 million, compared to $22.5 million in the same period of the prior fiscal year. During the second quarter of fiscal year 2020, we entered into the A&R Distribution Agreement, pursuant to which we were granted the exclusive, worldwide right to distribute the Products. In connection therewith, we entered into the A&R Sub-Distribution Agreements and other agreements with counterparties and granted such sub-distributors the right to distribute the Products to non-retail customers within the Territory. We have continued to enter into additional A&R Sub-Distribution Agreements, thereby increasing our distribution of the Products and, ultimately, we expect our revenues to increase during the remainder of the current fiscal year. We recognize revenue when a customer obtains control of promised goods. In some cases, we provide customers with 120-day payment terms, with the ability for a full refund for products not sold during that 120-day period. During such periods the risk of loss on the products delivered remains with the Company. In such case, the customer typically obtains control on the products when the customer purchases and ships the product to their customer or pays the Company for the product.
Cost of Revenue and Gross Profit:
Gross profit in the first six months of fiscal year 2021 was approximately $11.1 million, compared to approximately $4.2 million for the first six months of fiscal year 2020. Total cost of revenue was approximately $44.4 million for the first six months of fiscal year 2021, compared to $18.3 million for the first six months of fiscal year 2020 and the decrease in cost of products sold.
Operating Expenses:
Total operating expenses were approximately $14.7 million for the first six months of fiscal year 2021, compared to approximately $471,000 for the first six months of fiscal year 2020. For the first six months of fiscal year 2021, operating expenses consisted of commissions paid pursuant to the Further Amended Service Agreement of approximately $1.8 million and general and administrative expenses of approximately $13.0 million. General and administrative expenses in the first six months of fiscal year 2021 consisted primarily of legal fees, salaries, other professional fees, merchant fees, and other service fees. Total operating expenses for the first six months of fiscal 2020 were approximately $471,000 and consisted of general and administrative expenses , which were primarily from professional fees, and approximately $260,000 in commissions paid pursuant to the Further Amended Service Agreement.
Income Taxes:
During the first six months of fiscal year 2021, we expensed approximately $293,100 for prior year income taxes, compared to the approximately $950,400 accrual for the first six months of fiscal year 2020. Please refer to Note 8, Income Tax, in the Notes to the Consolidated Financial Statements in this Quarterly Report for additional information related to our income taxes.
Net Income (Loss):
Net loss for the first six months of fiscal year 2021 was approximately $3.9 million, or $(0.01) basic and diluted earnings per share, compared to net income of approximately $2.8 million, or $0.00 basic and diluted earnings per share, for the first six months of fiscal year 2020. The decrease in net income for the first six months of fiscal year 2021, as compared to the first six months of fiscal year 2020, is attributable to the increase in operating expenses and commissions and the decrease in revenues.
Weighted-average common stock shares outstanding were 280,242,288 in the first six months of fiscal year 2021 and 572,364,574 for the first six months of fiscal year 2020.
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Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources that is material to investors.
Critical Accounting Policies and Estimates
Other than the policy changes disclosed in Note 2, Basis of Presentation and Significant Accounting Policies, to the unaudited Financial Statements in Item 1 of Part I of this Quarterly Report, there have been no material changes to our critical accounting policies and estimates during the six months ended April 30, 2021 from those disclosed in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K for the year ended October 31, 2020.
Recently Adopted Accounting Pronouncements
See Note 2, Basis of Presentation and Significant Accounting Policies, to the unaudited Financial Statements in Item 1 of Part I of this Quarterly Report for a description of recent accounting pronouncements and accounting changes.
We are an “emerging growth company,” that is exempt from certain financial disclosure and governance requirements for up to five years as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). The JOBS Act eases restrictions on the sale of securities and increases the number of stockholders a company must have before becoming subject to the SEC’s reporting and disclosure rules. We have not elected to use the extended transition period for complying with new or revised accounting standards under Section 102(b)(2) of the JOBS Act, that allows us to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide the information required by this Item.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of April 30, 2021, the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that because of material weakness in our internal control over financial reporting, our disclosure controls and procedures were not effective as of April 30, 2021.
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Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act, is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitations, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and our principal financial officer, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
During the quarter ended April 30, 2021, there was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
There are no material pending legal proceedings as defined by Item 103 of Regulation S-K, to which we are a party or of which any of our property is the subject, other than ordinary routine litigation incidental to the Company’s business.
As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide the information required by this Item.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On May 5, 2021, we issued an aggregate of 575,000 shares of our common stock to six employees as equity compensation pursuant to certain RSU agreements entered into with each employee. These shares had a fair market value at the date of grant of $0.14, which was closing price on the grant date as reported by the OTC Markets Group, Inc. (“OTCM”). On the vesting and issuance date, the shares were valued at $1.21 per share, which was the highest closing price of our common stock during the three days prior to the issuance date as reported by the OTCM. We issued the shares in reliance on the exemption from registration pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”)(in that the issuance of shares of our common stock issued did not involve any public offering).
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On May 5, 2021, we issued 60,000 shares of our common stock to an employee as equity compensation pursuant to a RSU agreement. These shares had a fair market value at the date of grant of $0.17, which was closing price on the grant date as reported by the OTCM. On the vesting and issuance date, the shares were valued at $1.21 per share, which was the highest closing price of our common stock during the three days prior to the issuance date as reported by the OTCM. 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 issued did not involve any public offering).
On May 5, 2021, we issued 140,000 shares of our common stock to an employee as equity compensation pursuant to a RSU agreement. These shares had a fair market value at the date of grant of $0.43, which was closing price on the grant date as reported by the OTCM. On the vesting and issuance date, the shares were valued at $1.21 per share, which was the highest closing price of our common stock during the three days prior to the issuance date as reported by the OTCM. 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 issued did not involve any public offering).
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
None.
The following exhibits are filed herewith as a part of this Quarterly Report.
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| (1) | Schedules and Exhibits omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company agrees to furnish supplementally a copy of any omitted schedule to the Securities and Exchange Commission upon request; provided, however, that the Company may request confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended, for any Schedule or Exhibit so furnished. |
*filed herewith
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| KAIVAL BRANDS INNOVATIONS GROUP, INC. | ||
| Date: June 21, 2021 | By: | /s/ Nirajkumar Patel |
| Nirajkumar Patel | ||
| President, Chief Executive Officer, and Chief Financial Officer | ||
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Exhibit 10.18
CONSULTING AGREEMENT
This Consulting Agreement (this “Agreement”) is made and entered into as of March 16, 2021, by and between Kaival Brands Innovations Group, Inc., a Delaware corporation (the “Company”), and Russell Quick (“Consultant”).
WHEREAS, the Company desires to engage Consultant to perform certain consulting services (the “Services”) relating to the Company’s business and financial affairs, including, but not limited to the identification of and introduction to individuals potentially qualified to serve as directors and/or officers of the Company; and
WHEREAS, Consultant is willing and able to perform such Services on behalf of the Company for the consideration and on the terms and conditions set forth below in this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and promises herein, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Company and Consultant, intending to be legally bound, hereby agree as follows:
1. Consulting Services. The Company hereby engages Consultant, and Consultant hereby accepts the engagement, to provide the Services to the Company during the term of this Agreement.
2. Duties. During the term of this Agreement, Consultant shall provide the Services as shall be reasonably requested from time to time by the Company’s management or the Board of Directors (the “Board”), including, but not limited to, introducing the Company’s management and the Board to individuals qualified to serve as directors and officers of the Company and advising the Company’s management and the Board on various matters. In rendering the Services hereunder, Consultant shall be acting solely as an independent contractor and not as an employee of the Company.
3. Compensation; Expense Reimbursements. In consideration of Consultant agreeing to render the Services, the Company shall grant to Consultant (i) on March 16, 2021, non-qualified stock options to purchase 500,000 shares of the Company’s common stock that completely vests on December 1, 2021 (the “March Options”), (ii) on December 1, 2021, the first Renewal Term (as defined below), non-qualified stock options to purchase 500,000 shares of the Company’s common stock that completely vests on December 1, 2022 (the “December 2021 Options”), and (iii) thereafter, on each December 1st during the Term (as defined below) of this Agreement, non-qualified stock options to purchase 500,000 shares of the Company’s common stock that completely vests on the one-year anniversary of the grant date (the “Annual Options” and, together with the March Options and the December 2021 Options, the “Options”). The Options shall be granted under and be subject to the terms and provisions of the 2020 Stock and Incentive Plan, as the same may be amended from time to time (the “Incentive Plan”), and shall be granted subject to the execution and delivery of option award agreements in substantially the same form attached hereto as Exhibit A, and as may, from time to time, be amended by the Board, setting forth such terms and conditions as may be required by the Board or the Incentive Plan. Consultant shall be entitled to reimbursement of reasonable expenses on such terms and conditions as are applicable to the Company’s non-employee directors. Except as specifically provided in this Agreement, Consultant shall not be entitled to receive any additional fee, compensation, or other benefit for providing the Services.
4. Confidential Information.
(a) “Confidential Information” means: (i) any information disclosed by the Company to Consultant, either directly or indirectly, in writing, orally or by inspection of tangible objects that has been designated by the Company as “confidential,” either in writing or orally, prior to, at or promptly after the time of disclosure, or that Consultant clearly understands by the nature of the information to be confidential, proprietary information of the Company; (ii) any information disclosed by the Company, its management, employees, or Board members, either in writing, orally or otherwise; and (iii) any information obtained or derived by Consultant, directly or indirectly, through inspection, examination, review or analysis of any of the foregoing. Confidential Information may also include information of a third party that is in the possession of the Company and is disclosed to Consultant. Confidential Information does not include information: (x) that is or becomes publicly known without any breach of this Agreement; or (y) that is independently developed by Consultant without use of any Confidential Information (Consultant shall bear the burden of establishing the applicability of this exception by competent evidence).
(b) Non-Use, Non-Disclosure and Return of Confidential Information. Consultant shall not, without the prior written consent of the Company: (i) use Confidential Information for any purpose other than to perform the Services; (ii) disclose Confidential Information to any third party; (iii) reverse engineer the function or mechanism of any Confidential Information; (iv) make any copies of Confidential Information; (v) enter into a transaction with any third party, the existence of or opportunity for which was first disclosed by the Company to Consultant as Confidential Information; or (vi) remove any Confidential Information from the Company’s premises or locations at which the Company, or the Board or committees of the Board, may hold meetings if the Company requests that it not be removed. Immediately upon termination of this Agreement, Consultant shall return to the Company and delete from any personal computer or other device all originals and all copies of any Company property, Confidential Information, and all materials, documents, notes, manuals, computer disks, computers or lists containing or embodying Confidential Information, or relating directly or indirectly to the business of the Company, which are in Consultant’s possession or control. Consultant specifically acknowledges that the Company’s possession of its Confidential Information gives the Company a competitive advantage over other companies or persons who do not possess such Confidential Information and, therefore, that any disclosure to or use of Confidential Information by persons not engaged by the Company or who are not authorized by the Company to receive or use the information will cause harm to the Company and provides such persons an unfair competitive advantage which they would not have had without the use of having obtained access to such Confidential Information.
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(c) No Trading on or Tipping of Confidential Information. Consultant acknowledges and agrees that he will be in a position to obtain, and will obtain in the performance of the Services, “material, nonpublic information” under applicable federal and state securities laws, rules, and regulations. Consultant acknowledges that he is aware that United States securities laws would prohibit any person in possession material, non-public information about a company from purchasing or selling, directly or indirectly, securities of such company (including entering into hedging transactions involving such securities), or from communicating such information to any other person under circumstances in which it is reasonably foreseeable that such person is likely to purchase or sell such securities. Consultant will not use or permit any third party to use any material, non-public information in contravention of United States securities laws and will not purchase, sell, trade, transfer or otherwise transact in the Company’s securities while in possession of any material, non-public information. Consultant may only purchase, sell, trade, transfer, or otherwise transact in the Company’s securities while not in possession of material, non-public information and then only during so-called “window periods” as set forth in the Company’s insider trading policy applicable to all executive officers and directors of the Company and its subsidiaries.
5. Injunctive Relief. Consultant agrees that his violation or threatened violation of any of the provisions of Section 4 of this Agreement shall cause immediate and irreparable harm to the Company. In the event of any breach or threatened breach of any of said provisions, Consultant consents to the entry of preliminary and permanent injunctions by a court of competent jurisdiction prohibiting Consultant from any violation or threatened violation of such provisions and compelling Consultant to comply with such provisions. This Section 5 shall not affect or limit, and the injunctive relief provided in this Section 5 shall be in addition to, any other remedies available to the Company at law or in equity for any such violation by Consultant.
6. Independent Contractor. From and after the date hereof, Consultant agrees that he shall be an independent contractor of the Company, not an employee, and that he has no authority to represent himself as an agent or employee or to assume or create any obligation or responsibility on behalf of or in the name of the Company, unless specifically authorized by the Company in writing. Consultant will bear sole responsibility to pay any taxes on his compensation and acknowledges that he will receive a Form 1099 from the Company after the end of each calendar year. Consultant also agrees that he shall not knowingly take any action which would impair the value of the business or assets of the Company or any subsidiary, including, without limiting the generality of the foregoing, interfere with contractual relationships of the Company or any subsidiary and their customers, suppliers, executives, or others, any action which disparages or diminishes the reputation of the Company or any subsidiary or any action which diverts customers of the Company or any subsidiary.
7. Term; Termination.
(a) The initial term of this Agreement shall be for a nine-month period, commencing on March 1, 2021 and ending on December 1, 2021 (the “Initial Term”). Thereafter, this Agreement shall automatically renew annually on December 1st of each year for additional one-year terms (the “Renewal Terms” and, together with the Initial Term, the “Term”).
(b) Either party may terminate this Agreement upon at least ten (10) days prior written notice to the other party.
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8. Assignment. This Agreement is personal to Consultant, and Consultant may not assign any interest herein in any manner whatsoever. Any purported assignment by Consultant shall be void. In addition to assignments by operation of law, the Company shall have the right to assign this Agreement to any person, firm or corporation, controlling, controlled by, or under common control with the Company (including, without limitation, any of its subsidiaries), or acquiring substantially all of its assets, but such assignment shall not release the Company from its obligations under this Agreement. The covenants and agreements of Consultant contained in Section 4 shall survive and remain in full force and effect beyond the term of this Agreement.
9. Applicable Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Florida, without reference to principles of conflict of laws. The exclusive venue for all actions involving the enforcement and/or interpretation of this Agreement shall be Orange County, Florida. Should any action, of any type, be necessary to enforce and/or interpret the terms of this Agreement, the substantially prevailing party shall be entitled to an award of its/his reasonable attorney’s fees and costs, at all levels including appeals.
10. Notices. All notices, requests, consents, and other communications required or provided under this Agreement shall be in writing and shall be deemed sufficient if delivered by hand, by email (with electronic “answerback” confirmation of successful transmission), nationally recognized overnight courier, or certified or registered mail, return receipt requested, postage prepaid, and shall be effective upon delivery as follows:
If to Consultant:
Russell Quick
_____________________________________________
_____________________________________________
Email: ________________________________________
If to the Company:
Kaival Brands Innovations Group, Inc.
4460 Old Dixie Highway
Grant, Florida 32949
Attn: Eric Mosser
Email: eric@kaivalbrands.com
Either party may change the address and/or email address to which notices are to be sent to that party by giving written notice of such change of address to the other party in the same manner above provided for giving notice.
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11. Severability. If any term, covenant, or condition of this Agreement or the application thereof to any party or circumstance shall, to any extent, be determined to be invalid or unenforceable, the remainder of this Agreement, or the application of such term, covenant, or condition to parties or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby and each term, covenant, or condition of this Agreement shall be valid and be enforced to the fullest extent permitted by law, and any court having jurisdiction may reduce the scope of any provision of this Agreement so that it complies with applicable law.
12. Entire Agreement. This Agreement constitutes the entire agreement of the parties relative to the subject matter contained herein, superseding, canceling, and replacing all prior agreements, with respect thereto. No promises, covenants, or representations of any character or nature other than those expressly stated herein have been made to induce either party to enter into this Agreement. This Agreement shall not be amended, modified, waived, or discharged except in writing duly signed by each of the parties or their authorized assignees.
13. Waiver. Consultant’s or the Company’s failure to insist upon strict compliance with any provision of, or to assert any right under, this Agreement shall not be deemed to be a waiver of such provision or right or of any other provision of or right under this Agreement except to the extent any other party hereto is materially prejudiced by such failure.
14. Headings. The headings in this Agreement are for convenience of reference only and shall not affect in any way the construction or interpretation of this Agreement.
15. Execution. This Agreement may be executed in two or more counterparts, each of which shall be an original, but all of which shall constitute one and the same instrument. Facsimile or other electronic signatures shall be accepted by the parties as originals.
[SIGNATURES ON FOLLOWING PAGE]
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written.
| Consultant | Kaival Brands Innovations Group, Inc. | ||
| /s/ Russell Quick | By: | /s/ Eric Mosser | |
| Russell Quick, individually | Name: | Eric Mosser | |
| Its: | Chief Operating Officer | ||
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EXHIBIT A
Form of Non-Qualified Stock Option Award Agreement
KAIVAL BRANDS INNOVATIONS GROUP, INC.
2020 STOCK AND INCENTIVE COMPENSATION PLAN
Nonqualified Stock Option
Grant of Option. KAIVAL BRANDS INNOVATIONS GROUP, INC., a Delaware corporation (the “Company”), hereby grants to the Awardee named below a Nonqualified Stock Option for the purchase of up to but not exceeding the number of shares of the Company’s Common Stock, $.001 par value per share (the “Option”), exercisable at the price and upon the terms and conditions set forth below, and subject to any adjustments made pursuant to Section 14 of the Company’s 2020 Stock and Incentive Compensation Plan (“Plan”):
| Awardee: | Russell Quick | ||
| Number of Shares: | 500,000 | ||
| Grant Date: | March 16, 2021 | ||
| Exercise Price/Share: | $2.39 | ||
| Expiration Date: | March 15, 2031 | ||
Approval of Counsel Required for Issuance of Common Stock. No shares of Common Stock shall be issued pursuant to the exercise of the Option unless counsel for the Company shall be satisfied that such issuance will be in compliance with applicable Federal and state securities laws.
Option Subject to Plan. The Option is granted as a Nonqualified Stock Option as defined in Section 2(w) of the Plan that is not intended to qualify as an incentive stock option within the meaning of Section 422 of the Internal Revenue Code, is issued pursuant to the Plan, and is in all respects subject to the terms, provisions, conditions and restrictions of the Plan. In the event of any conflict between this instrument and the Plan, the Plan shall control.
Defined Terms. Except as otherwise defined herein, capitalized terms used in this instrument shall have the meanings ascribed to such terms in the Plan.
Exercise Price. The Option exercise price set forth above for each related Common Share is not less than the Fair Market Value of each Common Share calculated as of the date of grant in accordance with Section 2(t) of the Plan. The exercise price is subject to adjustment pursuant to Section 14 of the Plan.
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Vesting of Option. The Option will become vested and exercisable with respect to the number of shares set forth in the vesting schedule below until the Option is 100% vested, except as otherwise provided in the Plan:
| DATE VESTED AND EXERCISABLE | NUMBER of SHARES EXERCISABLE |
| December 1, 2021 | 500,000 |
Option Period. The Option, or any part thereof, may be exercised at any time between the date at which it becomes vested and exercisable and the Expiration Date set forth above, inclusive of such dates, except that in the event of the Awardee’s death, or his or her Disability (as defined under Section 2(p) of the Plan), or if the Awardee’s employment by the Company is terminated for any reason, or if there is a Change of Control of the Company, then the provisions of Sections 12(c) and 14(b) of the Plan, respectively, shall govern the option period.
Method of Exercise. The Option is exercisable by providing a written notice of exercise in accordance with the procedures adopted by the Committee, but subject to all conditions and restrictions set forth in the Plan, and the Option consideration shall be payable in one of the forms permitted under Section 8(f) of the Plan, as determined by the Committee. The exercise price for the number of shares exercised under the Option shall be payable in full at the time of exercise.
Transferability. The Option is not assignable or transferable except by will or the laws of descent or distribution and is exercisable during the Awardee’s lifetime only by him or her. No assignment or transfer of the Option, or the rights represented thereby, whether voluntary or involuntary, by operation of law or otherwise (except to a designated beneficiary, upon death, by will or the laws of descent or distribution) will vest in the assignee or transferee any interest or right herein whatsoever, but immediately upon such assignment or transfer the Option will terminate and become of no further effect.
Tax Withholding on Exercise. Awardee shall satisfy the Company’s withholding obligation of any federal, state, local or foreign taxes of any kind required to be withheld as a result of an exercise of the Option by providing payment of the amount of such withholding: (i) by cash, certified or cashier’s check, money order or personal check; (ii) by delivery of shares of the Company’s common stock already owned by Awardee; (iii) by the Company’s withholding from other compensation payable to Awardee by the Company; or (iv) pursuant to a request by Awardee, by withholding from the shares of common stock to be delivered upon exercise of the Option no more than the maximum number of shares that is necessary to satisfy the statutory withholding obligation.
| KAIVAL BRANDS INNOVATIONS GROUP, INC. | ||||
| By: | Date: | |||
| Title: | ||||
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The Awardee acknowledges receipt of a copy of the Plan, represents that he or she is familiar with the terms and provisions thereof, and hereby accepts the Option evidenced hereby subject to all the terms, provisions, conditions and restrictions of the Plan. The Awardee also understands that this Option is not intended to qualify as an Incentive Stock Option as defined in Section 422 of the Code. Accordingly, the Awardee understands that he or she will recognize taxable income upon exercise of the Option based on the difference between the Option exercise price and the Fair Market Value of the shares at the time of exercise.
| Signature: | ||
| Printed Name: | ||
| Date: |
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Exhibit 10.19
SECOND AMENDMENT TO SERVICE AGREEMENT
This Second Amendment to Service Agreement (this “Second Amendment”), effective as of March 16, 2021 (“Second Amendment Effective Date”), is by and between KAIVAL BRANDS INNOVATIONS GROUP, INC., a Delaware corporation (the “Client”), and QUIKFILLRX LLC, a Florida limited liability company (the “Contractor”).
WHEREAS, the Client and the Contractor entered into that certain Service Agreement effective as of March 31, 2020 (the “ Original Agreement”), as amended by that First Amendment effective as of June 2, 2020 (the “First Amendment” and, together with the Original Agreement, the “Agreement”); and
WHEREAS, the Client and the Contractor desire to further amend the Agreement as set forth in this Second Amendment.
NOW, THEREFORE, in consideration of the premises set forth above and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Client and the Contractor agree as follows:
AMENDMENT AND AGREEMENT
| 1. | Defined Terms. Capitalized terms used and not otherwise defined herein will have the respective meanings ascribed to them in the Agreement. |
| 2. | Amendments. The Agreement is amended as follows: |
| 2.1 | Schedule “B” – Compensation of the Agreement is amended and restated in its entirety as follows: |
“General Compensation: The following constitutes “General Compensation”:
| ● | For each calendar month commencing November 1, 2020 through October 31, 2021, on or before the ninth (9th) day of such month, the Client shall pay the Contractor an amount equal to $125,000 for the Services to be performed during such calendar month. |
| ● | In the event the Parties further agree to extend the term of this Agreement beyond October 31, 2021 and such extension is agreed to on or before October 15, 2021, but in any event subject to the express terms of any such mutual extension or renewal and in the event of any inconsistency between the terms hereof and the terms of such extension or renewal the terms of such extension or renewal shall control to the extent of such inconsistency, (i) this Agreement shall renew for an additional term of one year commencing November 1, 2021 through October 31, 2022, and (ii) for each calendar month commencing during such renewal term, on or before the ninth (9th) day of such month, the Client shall pay the Contractor an amount equal to $150,000 for Services to be performed during such calendar month. | |
| ● | In the event the Parties further agree to extend the term of this Agreement beyond October 31, 2022 and such extension is agreed to on or before October 15, 2022, but in any event subject to the express terms of any such mutual extension or renewal and in the event of any inconsistency between the terms hereof and the terms of such extension or renewal the terms of such extension or renewal shall control to the extent of such inconsistency, (i) this Agreement shall renew for an additional term of one year commencing November 1, 2022 through October 31, 2023, and (ii) for each calendar month commencing during such renewal term, on or before the ninth (9th) day of such month, the Client shall pay the Contractor an amount equal to $150,000 for Services to be performed during such calendar month. |
Gross Revenue Quarterly Bonus Compensation: The following constitute “Bonus Compensation”:
During the renewal Term of this Agreement expiring October 31, 2021, and during any extension or renewal of this Agreement as may be mutually agreed upon by the Parties in writing, but in any event subject to the express terms of any such mutual extension or renewal and in the event of any inconsistency between the terms hereof and the terms of such extension or renewal the terms of such extension or renewal shall control to the extent of such inconsistency, the Client shall pay the Contractor bonus compensation based on the Client’s gross quarterly sales during each applicable fiscal quarter that are attributable to the Services provided by the Contractor hereunder, as the same may be reasonably determined by the Client (such amount being hereinafter referred to as the “Applicable Gross Quarterly Sales”), which determination shall be made by the Client within fifteen (15) calendar days following the end of any applicable fiscal quarter and the amount of such bonus shall be paid on or before the thirtieth (30th) day of such calendar month as follows:
| ● | An amount equal to 0.9% of the Applicable Gross Quarterly Sales, which amount shall, at the Client’s option be paid in (a) cash or (b) shares of the Client’s common stock, par value $0.001 per share (“Common Stock”), or (c) a combination of cash and Common Stock, subject to the following: |
| ► | If the Client determines to issue shares of Common Stock in lieu of cash payment, then the number of shares to be issued shall be based upon a per share price equal to the average closing price of the Client’s Common Stock as reported by the OTC Markets Group, Inc. on the three (3) trading days immediately preceding the date of issuance of such shares of Common Stock. |
| ► | The shares of Common Stock issued to the Contractor shall be issued with a restrictive legend. Unless the shares of Common Stock are covered by an effective registration statement pursuant to the Securities Act of 1933, as amended (the “Securities Act”), an event that is not currently anticipated, the shares of Common Stock shall constitute “restricted securities,” as such term is defined in Rule 144 promulgated under Rule 144 of the Securities Act. The Contractor acknowledges and agrees that: (i) the shares of the Common Stock will not have been registered under the Securities Act or the securities laws of any state, (ii) there may not exist a market for resale of the shares of Common Stock, and (iii) such shares of Common Stock may need to be held indefinitely unless the shares of Common Stock are subsequently registered under the Securities Act or an exemption from registration is available. The Client has no obligation to register the shares of Common Stock under the Securities Act or otherwise. In connection with any transfer of the shares of Common Stock by the Contractor, the Client may require the Contractor to provide to the Client, at its expense, an opinion of counsel, satisfactory to the Client, that such transfer is in compliance with all applicable federal and state securities laws (including, without limitation, the Securities Act). Any attempted disposition of the shares of Common Stock not in accordance with the terms and conditions set forth in this Schedule “B”, shall be null and void, and the Company shall not reflect on its records any change in record ownership of any shares of Common Stock as a result of any such disposition, shall otherwise refuse to recognize any such disposition, and shall not in any way give effect to any such disposition of any shares of Common Stock. |
| ► | In no event shall the Client be permitted to exercise its option to issue the Client’s Common Stock in lieu of a cash payment for such Bonus Compensation (i) subject to the express terms of any such mutual extension or renewal and in the event of any inconsistency between the terms hereof and the terms of such extension or renewal the terms of such extension or renewal shall control to the extent of such inconsistency, in excess of an aggregate amount of 12,000,000 shares of Common Stock for any renewal term for the periods commencing November 1, 2020 through October 31, 2021, commencing November 1, 2021 through October 31, 2022, or commencing November 1, 2022 through October 31, 2023, and (ii) subject to the express terms of any such mutual extension or renewal and in the event of any inconsistency between the terms hereof and the terms of such extension or renewal the terms of such extension or renewal shall control to the extent of such inconsistency, the maximum amount of the Client’s Common Stock issuable in connection with any such Bonus Compensation for the period beginning on the Effective Date through October 31, 2023 shall not exceed an amount equal to 30,000,000 shares of Common Stock. |
| ► | Notwithstanding anything to the contrary contained herein, if the Client either (i) suffers a Change of Control Transaction or (ii) generates gross revenues, in the aggregate, in excess of $1 billion during the period between March 9, 2020 and October 31, 2023 (the “Revenue Target”); provided that the Agreement is still in effect at the date either the Change of Control Transaction occurs or the Revenue Target is met, then within five (5) business days of the closing of such Change of Control Transaction or the Revenue Target is met the Client shall issue the Contractor a number of shares of Common Stock equal to 12,000,000 shares less the number of shares of Common Stock previously issued to the Contractor during the applicable period, if any, in which such Change of Control Transaction or the Revenue Target occurs (with the applicable period being the period commencing November 1, 2020 through October 31, 2021, the period commencing November 1, 2021 through October 31, 2022, or the period commencing November 1, 2022 through October 31, 2023). If the Client terminates this Agreement as part of such Change of Control Transaction, no further Bonus Compensation shall be payable by the Client to the Contractor for the fiscal quarter in which the Change of Control Transaction occurs. If this Agreement continues following such Change of Control Transaction, the Client shall be credited the value of such Common Stock against any obligation to pay Bonus Compensation for the fiscal quarter in which the Change of Control Transaction occurs. Notwithstanding anything to the contrary above, in no event shall the Client be obligated to issue the Contractor any shares of Common Stock pursuant hereto if the Client provides notice to the Contractor of termination of this Agreement prior to the consummation of the Change of Control Transaction or the Revenue Target is met with (for) cause. A “Change of Control Transaction” means any of the following: (i) any sale, lease or other disposition of all or substantially all of the Client’s assets, (ii) any merger, consolidation, equity exchange, reorganization, or other similar transaction or series of transactions in which the equity holders of the Client as of the Effective Date collectively own fifty percent (50%) or less of the voting power in the resulting entity immediately after such event, and (iii) any purchase or purchases by any person or persons of equity interests of the Client, the effect of which is that the equity holders of the Client as of the Effective Date collectively own fifty percent (50%) or less of the voting power in the Client immediately after such event. |
An amount equal to 0.27% of the Applicable Gross Quarterly Sales, which amount must be paid in cash.
Reimbursement of Certain Expenses: The following constitute “Reimbursable Expenses”:
The Client shall reimburse the Contractor for any actual out-of-pocket, third-party expenses incurred by the Contractor so long as the same are pre-approved by the Client in writing, which approval may be given or withheld in the Client’s sole discretion. In no event shall the Client be obligated to reimburse the Contractor for any internal expenses, including staff, overhead or allocation of resources or for any other costs incurred by the Contractor in the performance of Services.”
| 3. | No Other Amendment; Effective Date. Except as expressly set forth herein, this Second Amendment shall not by implication or otherwise alter, modify or amend or in any way affect any of the terms, conditions, obligations, covenants, or agreements contained in the Agreement, all of which are revived in all respects and shall be in full force and effect. This Second Amendment will be deemed effective as of the Second Amendment Effective Date. |
| 4. | Governing Law. This Second Amendment shall be deemed executed and delivered in the State of Florida and shall be governed and enforced by and interpreted in accordance with the laws of the State of Florida, without giving effect to its conflicts of laws rules and principles. |
| 5. | Counterparts. This Second Amendment may be executed in counterparts; each of which when so executed and delivered shall be deemed an original and such counterparts shall constitute one instrument. |
[Signature page follows.]
IN WITNESS WHEREOF, the parties have executed this Second Amendment as of the Second Amendment Effective Date:
| CLIENT | ||
| KAIVAL BRANDS INNOVATIONS GROUP, INC. | ||
| By: | /s/ Eric Mosser | |
| Name: | Eric Mosser | |
| Title: | Chief Operating Officer | |
| CONTRACTOR | ||
| QUIKFILLRX LLC | ||
| By: | /s/ Russell Quick | |
| Name: | Russell Quick | |
| Title: | Manager | |
Exhibit 31.1
Certification of Chief Executive Officer and Chief Financial Officer
Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934
I, Nirajkumar Patel, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Kaival Brands Innovations Group, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| Date: June 21, 2021 | By: | /s/ Nirajkumar Patel |
| Nirajkumar Patel | ||
| President, Chief Executive Officer, and Chief Financial Officer |
Exhibit 32.1
Certification of Chief Executive Officer and 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 Executive Officer and Chief Financial Officer of Kaival Brands Innovations Group, Inc. (the “Company”) does hereby certify, to the best of such officer’s knowledge, that:
| 1. | The Quarterly Report on Form 10-Q of the Company for the quarterly period ended April 30, 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: June 21, 2021 | By: | /s/ Nirajkumar Patel |
| Nirajkumar Patel | ||
| President, Chief Executive Officer, and Chief Financial Officer |
The certifications set forth above are being furnished as an exhibit solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, nor shall they be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended.
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Kaival Brands Innovations Group, Inc. and will be retained by Kaival Brands Innovations Group, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.