Kaival Brands(KAVL) - 2022 Q4 - Annual Report

PART I Business Kaival Brands distributes BIDI Stick ENDS products globally, navigating FDA regulations and expanding internationally through a licensing agreement with Philip Morris International - The company's core business is the exclusive worldwide distribution of BIDI Stick ENDS products, manufactured by its affiliate Bidi Vapor, LLC[16] - A key legal development in August 2022 saw the 11th Circuit Court of Appeals vacate the FDA's Marketing Denial Order (MDO) for Bidi's non-tobacco flavored products, allowing continued sales pending further FDA review[28][31] - Through its subsidiary KBI, the company entered into a major international licensing agreement with Philip Morris Products S.A. (an affiliate of PMI) to manufacture and sell BIDI Stick-based technology in international markets[44][47] Customer Revenue Concentration (Fiscal Year 2022) | Customer | Percentage of Revenue | | :--- | :--- | | Favs Business, LLC | ~31% | | H.T. Hackney Co. | ~15% | | GPM | ~12% | - The company is 100% reliant on its affiliate, Bidi Vapor, for the purchase of all its inventory; in FY2022, purchases from Bidi amounted to approximately $1.5 million, a significant decrease from $61.9 million in FY2021[54] - According to a Goldman Sachs report using Nielsen data, the BIDI® Stick was the top disposable ENDS product by retail sales for the 52-week period ending December 17, 2022, but its market share decreased significantly to 3.2% from 24.2% in the prior year period[77] Risk Factors The company faces significant risks including sole supplier dependence, regulatory uncertainty, intense competition, and identified material weaknesses in internal controls - The company relies exclusively on its affiliate, Bidi Vapor, as the sole supplier of the products it distributes; any disruption would severely harm the business[92][93] - Key sales, marketing, and other support functions are outsourced to a single consultant, QuikfillRx; the loss of this relationship would significantly damage the company's ability to operate[97] - Despite the 11th Circuit vacating the FDA's Marketing Denial Order (MDO), the ultimate outcome of the FDA's scientific review of Bidi's Premarket Tobacco Product Application (PMTA) remains uncertain, posing a significant ongoing regulatory risk[99][102] - The company faces intense competition from 'big tobacco' companies that have substantially greater financial resources, experience, and market penetration[113] - Ownership is highly concentrated, with officers, directors, and principal stockholders beneficially owning approximately 77.1% of the outstanding common stock, allowing them to exert significant influence over corporate decisions[150] - Management has identified material weaknesses in the company's internal controls over financial reporting, including insufficient resources for segregation of duties and an underdeveloped formal review process[160][397] Unresolved Staff Comments The company reports that it has no unresolved staff comments from the SEC - None[169] Properties The company leases its 21,332 sq ft main office and warehouse in Grant, Florida, from a related party, with prior satellite storage leases terminated in 2022 - On June 10, 2022, the company entered into a new lease for its main office and warehouse (21,332 sq. ft.) in Grant, Florida[173] - The lessor is Just Pick, LLC, a related party owned by Nirajkumar Patel, the company's Chief Science and Regulatory Officer and director[173] - The initial base rent is $17,776.67 per month, with annual increases[173] Legal Proceedings The company is not currently a party to any legal proceedings that are expected to have a material adverse effect on its business - The company is not currently involved in any material legal proceedings[174] - The company notes that its business could be materially affected by the outcome of legal or regulatory proceedings involving its affiliate and sole supplier, Bidi Vapor[175] Mine Safety Disclosures This section is not applicable to the company's business - Not applicable[176] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities KAVL common stock trades on Nasdaq, with 56.17 million shares outstanding as of January 27, 2023, no dividends paid, and significant equity changes in FY2022 including preferred stock conversion - The company's common stock began trading on the Nasdaq Capital Market on July 20, 2021, under the symbol 'KAVL'[178] - As of January 27, 2023, there were 56,169,090 shares of common stock issued and outstanding[179] - The company has never paid dividends and does not intend to pay any in the foreseeable future[180] - During fiscal year 2022, all 3,000,000 shares of Series A Preferred Stock were converted into 25,000,000 shares of common stock by a related party, Kaival Holdings, LLC[187] Management's Discussion and Analysis of Financial Condition and Results of Operations FY2022 saw a sharp revenue decline to $12.8 million and a $14.4 million net loss due to competition and regulatory impacts, though management believes going concern issues are alleviated Fiscal Year Financial Performance Comparison | Metric | FY 2022 | FY 2021 | | :--- | :--- | :--- | | Total Revenues, net | $12.8 million | $58.8 million | | Gross Profit | $1.2 million | $11.9 million | | Operating Expenses | $15.6 million | $22.4 million | | Net Loss | $(14.4) million | $(9.0) million | | Basic & Diluted EPS | $(0.36) | $(0.38) | - The decrease in revenue was primarily due to increased competition from illegally marketed products and the impact of Bidi's MDO, which limited sales of flavored BIDI Sticks for most of the fiscal year[213] - Management believes that substantial doubt about the company's ability to continue as a going concern has been alleviated due to positive working capital ($7.5 million), the favorable 11th Circuit court ruling, and the ongoing scientific review of Bidi's PMTAs[201][202] - Cash used in operations decreased to ($5.7) million in FY2022 from ($9.3) million in FY2021, primarily due to a significant reduction in inventory purchases[211] - As of October 31, 2022, the company had a related-party receivable balance of $3.7 million due from its supplier, Bidi, resulting from a canceled inventory order and other credits[225] Quantitative and Qualitative Disclosures about Market Risk As a smaller reporting company, Kaival Brands is not required to provide the information for this item - The company qualifies as a smaller reporting company and is not required to provide this information[234] Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for FY2022 and FY2021, highlighting key changes in balance sheet items and the alleviation of going concern doubts - The independent registered public accounting firm, MaloneBailey, LLP, issued an unqualified audit opinion on the consolidated financial statements[238] Consolidated Balance Sheet Highlights | Metric | October 31, 2022 | October 31, 2021 | | :--- | :--- | :--- | | Cash | $3,685,893 | $7,760,228 | | Inventories | $1,239,725 | $15,326,370 | | Total Assets | $12,437,034 | $30,190,520 | | Accounts payable- related party | $0 | $12,667,769 | | Total Liabilities | $2,636,254 | $13,866,207 | | Total Stockholders' Equity | $9,800,780 | $16,324,313 | Consolidated Statement of Operations Highlights | Metric | Year Ended Oct 31, 2022 | Year Ended Oct 31, 2021 | | :--- | :--- | :--- | | Total revenues, net | $12,761,457 | $58,776,430 | | Gross profit | $1,241,025 | $11,933,880 | | Net loss | $(14,370,335) | $(9,033,438) | - Note 3 (Going Concern) states that while recurring losses raised substantial doubt, management's plans, including the favorable court ruling on the MDO, are believed to alleviate this doubt[314][315][316] - Note 5 (Stockholders' Equity) confirms that on June 24, 2022, all 3,000,000 shares of Series A Preferred Stock were converted into 25,000,000 shares of Common Stock[331] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[392] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were ineffective as of October 31, 2022, due to material weaknesses, and remediation measures are underway - Management's evaluation concluded that disclosure controls and procedures were not effective as of October 31, 2022[394] - Management also concluded that internal control over financial reporting was ineffective due to material weaknesses[397] - The identified material weaknesses include a lack of resources for segregation of duties, insufficient real-time communication, and the lack of a fully developed formal review process for financial reporting[397] - The company is undertaking remediation measures, including implementing procedures to ensure proper segregation of duties and hiring additional resources[398] Other Information The company reports no other information for this item - None[402] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This section is not applicable to the company - Not Applicable[403] PART III Directors, Executive Officers and Corporate Governance This section details the company's executive officers and five-member board, noting three independent directors and the establishment of Audit, Compensation, and Governance committees Executive Officers and Directors | Name | Position(s) | | :--- | :--- | | Nirajkumar Patel | Chief Science & Regulatory Officer, Treasurer, and Director | | Eric Mosser | President & Chief Operating Officer, Secretary, and Director | | Mark Thoenes | Interim Chief Financial Officer | | Paul Reuter | Director | | Roger Brooks | Director | | George Chuang | Director | - The Board of Directors has determined that Paul Reuter, Roger Brooks, and George Chuang are independent directors[469] - The company has an Audit Committee, Compensation Committee, and Governance and Nominating Committee, each composed entirely of independent directors[417][418][420] - The company adopted a Code of Ethics and Business Conduct on March 17, 2021[416] Executive Compensation Executive compensation for FY2022, significantly influenced by stock option awards, is detailed, with Nirajkumar Patel receiving $2.5 million and Eric Mosser $2.2 million Summary Compensation Table (Fiscal Year 2022) | Name and Principal Position | Salary ($) | Bonus ($) | Option Awards ($) | Total ($) | | :--- | :--- | :--- | :--- | :--- | | Nirajkumar Patel, Chief Science & Regulatory Officer | 244,000 | 30,000 | 2,139,989 | 2,514,282 | | Eric Mosser, President & COO | 226,577 | 20,000 | 1,854,991 | 2,196,984 | | Mark Thoenes, Interim CFO | 347,201 | 0 | 310,998 | 658,189 | - On June 24, 2022, the Board approved annual base salary increases to $300,000 for Eric Mosser and $276,000 for Nirajkumar Patel[425] - In March 2022, the company granted significant stock option awards to Nirajkumar Patel (600,000 shares) and Eric Mosser (500,000 shares)[426][427] - The company does not have formal written employment agreements with its principal executive officers, Mr. Patel and Mr. Mosser[444] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters As of January 27, 2023, company ownership is highly concentrated, with Kaival Holdings, LLC (controlled by executives) owning 74.77% and the executive officers and directors as a group owning 78.14% - As of January 27, 2023, Kaival Holdings, LLC, controlled by Nirajkumar Patel and Eric Mosser, beneficially owned 42,000,000 shares, representing 74.77% of the outstanding common stock[455][463] - The current executive officers and directors as a group beneficially own 43,891,630 shares, representing 78.14% of the class[455] - All 3,000,000 shares of Series A Preferred Stock were converted into common stock on June 24, 2022, leaving no preferred stock issued or outstanding[464] Certain Relationships and Related Transactions, and Director Independence The company's most significant related-party transaction is its complete reliance on Bidi Vapor, LLC for all product inventory, and the Board has determined that three of its five members are independent - For the year ended October 31, 2022, 100% of product inventories were purchased from Bidi Vapor, LLC, a company owned by director and officer Nirajkumar Patel[467] - The Board has determined that directors Paul Reuter, Roger Brooks, and George Chuang are independent[469] Principal Accounting Fees and Services This section details the fees paid to the company's independent auditor, MaloneBailey, LLP, totaling $205,000 in FY2022, all pre-approved by the Audit Committee Auditor Fees (MaloneBailey, LLP) | Fee Type | 2022 | 2021 | | :--- | :--- | :--- | | Audit and review fees | $195,000 | $252,500 | | Audit-related fees | $10,000 | $3,820 | | All other fees | $0 | $55,000 | | Total | $205,000 | $311,320 | - All audit and non-audit services provided by the independent auditors were pre-approved by the Audit Committee[473] PART IV Exhibits, Financial Statement Schedules This section provides an index of all financial statements and exhibits filed with the annual report, including key agreements and certifications - This item provides an index of all financial statements and exhibits filed with the annual report[476][477] Form 10-K Summary The company reports no summary for this item - None[482]