Kaival Brands(KAVL) - 2021 Q3 - Quarterly Report

Part I - Financial Information Item 1. Financial Statements This section presents Kaival Brands' unaudited consolidated financial statements, showing asset and liability growth, a sharp Q3 revenue decline, and a nine-month net loss Unaudited Consolidated Balance Sheets Total assets increased to $23.9 million from $8.9 million, driven by receivables and inventories, while liabilities rose to $17.5 million, primarily due to related-party payables Consolidated Balance Sheet Highlights (Unaudited) | Account | July 31, 2021 | October 31, 2020 | | :--- | :--- | :--- | | Assets | | | | Cash | $938,435 | $7,421,701 | | Accounts receivable | $7,724,414 | $1,401,562 | | Inventories | $14,947,200 | $6,383 | | Total Current Assets | $23,839,216 | $8,845,006 | | Total Assets | $23,898,462 | $8,915,139 | | Liabilities & Equity | | | | Accounts payable- related party | $16,813,962 | $1,409,561 | | Total Current Liabilities | $17,479,243 | $4,438,327 | | Total Liabilities | $17,528,918 | $4,497,531 | | Total Stockholders' Equity | $6,369,544 | $4,417,608 | Unaudited Consolidated Statements of Operations Q3 2021 revenues sharply declined to $3.4 million, resulting in a $3.4 million net loss, while nine-month revenues grew slightly to $59.0 million but led to a $7.4 million net loss due to surging operating expenses Statement of Operations Summary (Unaudited) | Metric | Q3 2021 | Q3 2020 | Nine Months 2021 | Nine Months 2020 | | :--- | :--- | :--- | :--- | :--- | | Total Revenues | $3,442,978 | $32,375,309 | $58,953,576 | $54,881,463 | | Gross (Loss) Profit | ($84,290) | $4,399,296 | $10,998,587 | $6,936,804 | | Total Operating Expenses | $3,353,032 | $1,473,871 | $18,090,567 | $1,944,894 | | Net Income (Loss) | ($3,437,006) | $2,605,015 | ($7,384,432) | $3,721,069 | | Net Income (Loss) per Share | ($0.15) | $0.05 | ($0.32) | $0.08 | Unaudited Consolidated Statements of Changes in Stockholders' Equity Stockholders' equity increased from $4.4 million to $6.4 million, primarily due to a $9.3 million rise in additional paid-in capital, offsetting a $7.4 million net loss - Stockholders' equity increased from $4,417,608 at October 31, 2020, to $6,369,544 at July 31, 2021[18] - The increase was driven by a rise in Additional Paid-in Capital to $9,954,779, despite a retained deficit of ($3,611,835) resulting from a net loss for the period[18] Unaudited Consolidated Statements of Cash Flows Net cash used in operating activities was $6.3 million, a reversal from the prior year, driven by net loss and increased inventories, leading to a cash balance decrease from $7.4 million to $938,435 Cash Flow Summary (Unaudited) | Cash Flow Activity | Nine Months Ended July 31, 2021 | Nine Months Ended July 31, 2020 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | ($6,281,578) | $2,669,450 | | Cash flows used in financing activities | ($201,688) | $0 | | Net change in cash | ($6,483,266) | $2,669,450 | | Ending cash balance | $938,435 | $2,669,450 | Notes to Unaudited Consolidated Financial Statements The notes detail the company's business, accounting policies, and key financial components, including its exclusive distribution agreement with related party Bidi Vapor, a 1-for-12 reverse stock split, and significant related-party transactions - The company is the exclusive worldwide distributor of electronic nicotine delivery systems (ENDS) manufactured by Bidi Vapor, LLC, a related party owned by the company's CEO, Nirajkumar Patel[27][28] - A 1-for-12 reverse stock split of the company's common stock became effective on July 20, 2021, to support its application to list on Nasdaq[31][47] - For the nine months ended July 31, 2021, 100% of inventory purchases ($62.4 million) were from the related party, Bidi, and four major customers accounted for approximately 67% of total revenue[61][62] - A Patent Contribution Agreement with Next Generation Labs was terminated after the company did not meet the filing deadline for a securities offering, and the patents reverted to Next Generation[65][68][69] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the severe impact of FDA PMTA decisions on Q3 revenue, leading to a net loss, and outlines strategies for recovery through legal product focus and international expansion Impact of FDA PMTA Decision The FDA's PMTA deadline severely impacted Q3 sales, leading to a Marketing Denial Order for flavored products, but the company plans to focus on legal tobacco and menthol variants for recovery - Bidi Vapor received a Marketing Denial Order (MDO) for its flavored ENDS products, which historically constituted substantially all of the company's revenues[91][92] - The company believes its Classic (tobacco) and Arctic (menthol) BIDI Sticks are not subject to the MDO and will continue to be distributed, with Arctic (menthol) sales constituting approximately 15.2% of total BIDI Stick sales in Q3 2021[91][92] - Management believes that with the elimination of most flavored products, consumers will shift to available tobacco and menthol options, potentially restoring lost revenue[93] Future Strategic Opportunities The company anticipates market consolidation post-FDA actions, focusing on international expansion into 11 approved markets and launching a Kaival-branded Hemp CBD product for future growth - The company believes Bidi will be one of only a few remaining players in the disposable ENDS market, as many competitors who only sold flavored products are eliminated[99] - International markets, with an estimated total addressable market of $36.7 billion, are a key growth opportunity, with Bidi approved to market all products, including flavors, in 11 international markets[100][101] - The company announced plans to launch its first Kaival-branded product, a Hemp CBD product, utilizing Bidi's delivery mechanism[110][111] Liquidity and Capital Resources As of July 31, 2021, the company had $6.4 million in working capital and $938,000 cash, with $6.3 million cash used in operations, and plans to fund needs via operations or offerings Liquidity and Cash Flow | Metric | As of/For the Nine Months Ended July 31, 2021 | | :--- | :--- | | Working Capital | ~$6.4 million | | Total Cash | ~$938,000 | | Cash Flow from Operations | ~($6.3 million) | Results of Operations Q3 2021 revenues plummeted to $3.4 million, resulting in a $3.4 million net loss, while nine-month revenues grew to $59.0 million but led to a $7.4 million net loss due to surging operating expenses Q3 2021 vs Q3 2020 Performance | Metric | Q3 2021 | Q3 2020 | | :--- | :--- | :--- | | Revenues | ~$3.4 million | ~$32.4 million | | Gross (Loss) Profit | ~($84,000) | ~$4.4 million | | Net (Loss) Income | ~($3.4 million) | ~$2.6 million | Nine Months 2021 vs 2020 Performance | Metric | Nine Months 2021 | Nine Months 2020 | | :--- | :--- | :--- | | Revenues | ~$59.0 million | ~$54.9 million | | Gross Profit | ~$11.0 million | ~$6.9 million | | Operating Expenses | ~$18.1 million | ~$1.9 million | | Net (Loss) Income | ~($7.4 million) | ~$3.7 million | Item 3. Quantitative and Qualitative Disclosures About Market Risk The company is exempt from providing market risk disclosures as it qualifies as a "smaller reporting company" - The Company is not required to provide the information required by this Item as it qualifies as a "smaller reporting company"[133] Item 4. Controls and Procedures Management concluded that disclosure controls were ineffective as of July 31, 2021, due to a material weakness in internal control over financial reporting, with remediation plans underway - Management concluded that as of July 31, 2021, the company's disclosure controls and procedures were not effective[134] - The ineffectiveness was attributed to a material weakness in internal control over financial reporting, with the company intending to hire additional staff to address the issue[134] Part II - Other Information Item 1. Legal Proceedings The company is not currently a party to any material pending legal proceedings beyond routine litigation incidental to its business - There are no material pending legal proceedings to which the company is a party[138] Item 1A. Risk Factors The company is exempt from providing risk factor disclosures as it qualifies as a "smaller reporting company" - The Company is not required to provide the information required by this Item as it qualifies as a "smaller reporting company"[139] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds On August 8, 2021, the company issued 56,250 common shares to employees under RSU agreements, resulting in $352,137 in share-based compensation and $179,412 withheld for taxes - On August 8, 2021, the Company issued 56,250 shares of Common Stock to employees pursuant to RSU agreements, recognizing $352,137 of share-based compensation[140] Item 6. Exhibits This section lists all exhibits filed with the Quarterly Report on Form 10-Q, including corporate governance documents, material contracts, and officer certifications