Kaival Brands(KAVL) - 2023 Q4 - Annual Report

Cautionary Statement Regarding Forward-Looking Statements This section cautions that the report contains forward-looking statements and that actual results may differ due to various risks - Forward-looking statements are identified by words like 'may,' 'should,' 'believe,' 'expect,' 'intend,' 'plan,' 'anticipate,' 'likely,' 'estimate,' 'potential,' 'continue,' 'will,' and similar expressions[13] - Key uncertainties include substantial reliance on Bidi Vapor, ability to raise funding, integration of GoFire IP, and the impact of FDA decisions on Bidi's ENDS products[15][17] PART I Item 1. Business The Company primarily distributes BIDI® Stick ENDS products while pursuing diversification amid a complex regulatory landscape Overview and Business Strategy The core business is the exclusive distribution of Bidi Vapor's ENDS products, with a strategy focused on diversification - Primary product: BIDI® Stick, an electronic nicotine delivery system (ENDS) manufactured by affiliate Bidi Vapor LLC[21] - The Company holds the exclusive worldwide right to market and distribute the Bidi Stick and certain other Bidi products[21] - Strategic initiatives include maximizing core business, effective financial management, and data-driven product innovation[23][24][25] Description of Business Segments & Key Agreements This section details key distribution and licensing agreements, regulatory challenges, and the Company's marketing network Bidi Vapor, LLC Distribution Agreement - The Company has the exclusive worldwide right to distribute Bidi's ENDS products for a ten-year initial term, renewable for another ten years if minimum purchase thresholds are met[27][29] - Bidi Vapor, LLC is owned by Nirajkumar Patel, the Company's Chief Science and Regulatory Officer and director, making it a related party[27] - Sales are processed to non-retail customers through Bidi's age-restricted website, having ceased direct-to-consumer sales in February 2021 to comply with the PACT Act[31] Kaival Labs, Inc. & Kaival Brands International, LLC. - Kaival Labs, Inc. was formed to develop own-branded and white-label products, though none have commenced as of the report date[34] - The Company acquired vaporization and inhalation-related intellectual property from GoFire, Inc. in May 2023 through Kaival Labs to diversify product offerings[35] - Kaival Brands International, LLC (KBI) was formed to enter into an international licensing agreement with Philip Morris Products S.A. (PMPSA)[36] FDA PMTA and MDO Determinations, Related Court Actions and the Impact on Our Business - In September 2021, the FDA issued Marketing Denial Orders (MDOs) for non-tobacco flavored BIDI® Sticks, which were vacated by the 11th Circuit Court of Appeals in August 2022[37][39] - The 11th Circuit found the MDO 'arbitrary and capricious' because the FDA failed to consider Bidi's marketing and sales-access-restriction plans[39][40] - On January 22, 2024, the FDA issued an MDO for the Classic BIDI® Stick (tobacco-flavored), which Bidi is contesting via a petition for review[46][47] Other Potential Product Offerings & Opportunities - Acquired 19 existing and 47 pending patents related to vaporization and inhalation technologies from GoFire in May 2023[49] - The near-term goal is to seek third-party licensing opportunities in cannabis, hemp/CBD, nicotine, nutraceutical, and pharmaceutical markets[50] - The longer-term goal is to utilize acquired patents to create innovative and market-disruptive products[50] Marketing Strategy - The marketing strategy is based on FDA compliance and preventing underage access, avoiding social media and focusing on in-store marketing[53] - The Company utilizes Kaival Marketing Services for sales management, website development, social media, and market research support[56] Philip Morris Deed of Licensing Agreement - KBI entered an exclusive irrevocable license agreement with PMPSA to distribute disposable nicotine e-cigarette products in certain international markets[57] - The initial term is five years, automatically renewable for another five years if PMPSA meets minimum key performance indicators[58] - The royalty structure was amended in August 2023 from sales price-based to volume-based ($0.08-$0.16 per sale), with the guaranteed minimum royalty eliminated[59][62][63] - Received a Net Reconciliation Payment of $134,981 from PMPSA on September 8, 2023, due to the amendment[66] KBI License Agreements - Bidi granted KBI an exclusive irrevocable license to use Bidi's IP to fulfill KBI's obligations under the PMI License Agreement[69] - Net royalties payable to KBI under the PMI License Agreement are apportioned equally (50/50) between Bidi and KBI[70] Resellers - The potential distribution network reaches approximately 48,000 stores in the United States[72] - Products are available in national and regional convenience-store chains and through distributors like S. Abraham and Sons and H.T. Hackney Co[72] Concentrations - 100% of inventories were purchased from Bidi, a related party[73] Concentration of Purchases from Related Party (Bidi) | Fiscal Year Ended October 31, | Purchases from Bidi (approx.) | | :---------------------------- | :---------------------------- | | 2023 | $12.8 million | | 2022 | $1.5 million | Concentration of Revenues from Top Customers (FY2023) | Customer | Revenue Contribution (approx.) | | :------------------- | :----------------------------- | | GPM Investments | 15% | | H.T. Hackney Co | 14% | | FAVS Business, LLC | 14% | | C Store Master | 13% | | QuikTrip Corporation | 11% | Concentration of Accounts Receivable from Top Customers (FY2023) | Customer | Accounts Receivable Contribution (approx.) | | :------------------- | :----------------------------------------- | | FAVS Business LLC | 35% | | C Store Master | 35% | | QuikTrip Corporation | 19% | Environment and Government Regulation Related to our Operations The Company's operations are subject to extensive regulation and depend on its manufacturer's compliance - The business is entirely dependent on Bidi's compliance as the manufacturer of its distributed ENDS products[78][79] - The FDA's Deeming Rule extended regulatory authority to all tobacco products, including ENDS, requiring premarket authorization and age restrictions[81][82] - The PACT Act applies to ENDS, imposing substantial restrictions on sellers and shippers, including ATF and state registration[85] - Several states have banned non-tobacco flavored tobacco products, including e-cigarettes, impacting the market[87] - Vapor products are subject to excise taxes at state and local levels in approximately 31 states, which could reduce sales volume[89] Competition The Company faces intense competition from larger, better-capitalized "big tobacco" companies - Indirect competitors include "big tobacco" companies like Altria Group and British American Tobacco, many of whom are better capitalized[93] - Competitive factors include brand name recognition, perceived product quality, and the efforts of sales and marketing teams[93] Intellectual Property The Company owns trademarks and acquired patents, while also relying on its supplier's intellectual property - The Company owns the trademarks KAIVAL BRANDS and KAIVAL LABS[95] - Acquired 19 existing and 47 pending patents related to vaporization and inhalation technologies from GoFire[95] - The Company relies on Bidi's intellectual property rights for the marketing, advertisement, and sale of Bidi products[96] Employees The Company has eighteen full-time employees across various corporate and operational functions - The Company has eighteen full-time employees, including officers, sales, IT, warehouse, and financial staff[97] Emerging Growth Company The Company qualifies as an "emerging growth company" under the JOBS Act, allowing for reduced disclosure requirements - The Company is designated as an "emerging growth company" (EGC) under the JOBS Act of 2012[98] - EGC status provides eligibility for exemptions from certain financial disclosure and governance requirements for up to five years[98] - The Company has not elected to use the extended transition period for complying with new or revised financial accounting standards[98] Corporate History The Company has undergone several name changes, reorganizations, and stock splits since its 2018 incorporation - Incorporated on September 4, 2018, in Delaware, and changed its name to Kaival Brands Innovations Group, Inc. on July 12, 2019[99] - Underwent a 1-for-12 reverse stock split in July 2021 and a 1-for-21 reverse stock split in January 2024[107][115] - Acquired vaporization and inhalation-related intellectual property assets from GoFire, Inc. on May 30, 2023, in exchange for equity securities[109][110] Item 1A. Risk Factors The Company faces significant operational, regulatory, market, and financial risks that could materially affect its business Risks Related to Our Business and Industry - Substantial doubt exists about the Company's ability to continue as a going concern due to limited cash, negative cash flows, and recurring losses[119][120] - The Company has exclusive reliance on Bidi Vapor, LLC as the sole supplier of Bidi products, and the loss of this relationship would severely harm the business[124][125] - There is significant risk from FDA regulatory actions, including the January 2024 Marketing Denial Order (MDO) for the Classic BIDI® Stick[132][135][136] - Uncertainty exists regarding the monetization of intellectual property acquired from GoFire, Inc., with no assurance of immediate revenue generation[140] - The Company faces intense competition from better-capitalized "big tobacco" companies and illicit trade channels[141][148] - The market for ENDS products is evolving rapidly and is subject to unpredictable regulation, including potential state and local flavor bans[151][152][153] Risks Related to Our Securities - Provisions in the corporate charter and bylaws could discourage or prohibit acquisition bids, potentially depressing the stock price[173][174][176] - The Series B Preferred Stock ranks senior to Common Stock regarding dividend, liquidation, and redemption rights[177][178] - Future offerings of debt or equity securities may rank senior to Common Stock or result in significant dilution to existing stockholders[179] - The Company is currently experiencing a Nasdaq continuing listing deficiency for failing to hold an annual meeting of shareholders[184] - Ownership is concentrated with Kaival Holdings and officers/directors holding approximately 68.64%, which may lead to conflicts of interest[187] - The Company does not currently pay dividends on its common stock and has no intention of doing so in the foreseeable future[190] Item 1B. Unresolved Staff Comments The Company has no unresolved staff comments from the Securities and Exchange Commission Item 2. Properties The Company leases its main corporate office and warehouse space from a related party - The Company leases approximately 21,332 square feet for office and warehouse space in Grant-Valkaria, Florida[206] - The lease agreement is with Just Pick, LLC, a related party owned by Nirajkumar Patel, the Company's Chief Science and Regulatory Officer[205][206] - Monthly base rent escalates annually, starting at $17,777 in the first year, plus operating expenses, insurance, and taxes[206] Item 3. Legal Proceedings The Company is not currently involved in any material legal proceedings but could be indirectly impacted by those involving its affiliate - The Company is not currently involved in legal proceedings expected to have a material adverse effect on its business[207] - The outcome of Bidi Vapor's legal or regulatory proceedings could have a material indirect impact on the Company's ability to operate[208] Item 4. Mine Safety Disclosures This item is not applicable to the Company PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities This section provides information on the Company's common stock market, holders, dividend policy, and recent unregistered security issuances Market Information - The Common Stock began trading on the Nasdaq Capital Market under the symbol "KAVL" on July 20, 2021[212] - The last reported sales price of Common Stock was $2.70 as of February 8, 2024[212] Holders - There were approximately 7,400 record holders of Common Stock as of February 6, 2024[213] Dividends - No dividends have been paid on Common Stock[190] Recent Sales of Unregistered Securities; Uses of Proceeds from Registered Securities - Issued 900,000 shares of Series B Convertible Preferred Stock as consideration for the acquisition of intellectual property assets from GoFire in May 2023[223] - The Series B Preferred Stock carries no voting rights except for the ability of majority holders to nominate a director[223] Common Stock Issued (FY2023) | Purpose | Shares Issued | | :------------------------------------ | :------------ | | Acquisition of GoFire IP assets | 95,239 | | Advisory services (GoFire APA) | 4,381 | | Loan transaction with AJB Investments | 19,048 | Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the Company's financial performance, liquidity, and capital resources for fiscal year 2023 Overview - The business is focused on the sales, marketing, and distribution of ENDS products, primarily the BIDI® Stick[225] - The Company holds exclusive worldwide rights to distribute Bidi's ENDS products through wholesale and traditional retail channels[225][226] - The Company maintains international licensing agreements with Philip Morris and its affiliates[230] Material Items, Trends and Risks Impacting Our Business - The Company is wholly dependent on Bidi Vapor for its BIDI® Stick supply[232] - The Company is substantially dependent on Kaival Marketing Services for key marketing, sales, and support services[234] - The PMI Licensing Agreement is crucial for royalty revenue, and a deterioration of this relationship would materially harm results[238] - There is uncertainty in developing and monetizing the GoFire intellectual property, with no assurance of immediate revenue generation[239] - The business is heavily regulated by the FDA, with ongoing risks from PMTA outcomes and potential flavor bans[240] - Illicit trade and tobacco trafficking pose a significant threat, potentially reducing sales volume and damaging brand equity[241] - Inflation and economic conditions may impact discretionary consumer purchases of BIDI® Sticks, leading to reduced demand[245] Going Concern - Substantial doubt exists about the Company's ability to continue as a going concern due to significant payables, negative cash flows, and recurring losses[250] - Management plans to increase marketing and sales efforts to generate revenue, but there is no assurance these plans will succeed[251][252] Liquidity and Capital Resources - The Company believes existing cash is insufficient to fund operations for at least 12 months, raising substantial doubt about its going concern status[253] - The Company intends to rely on cash from operations and equity/debt offerings to meet liquidity needs[254] Liquidity and Capital Resources (as of October 31, 2023) | Metric | Amount (approx.) | | :-------------- | :--------------- | | Working Capital | $2 million | | Total Cash | $0.5 million | Cash Flows - The decrease in cash used in operations for FY2023 was primarily due to changes in related-party receivables and payables[255] - Cash used in investing activities for FY2023 included warehouse equipment purchases and transaction costs for the GoFire IP acquisition[256] Cash Flow Summary (Fiscal Years Ended October 31) | Activity | 2023 (approx.) | 2022 (approx.) | | :----------------------- | :------------- | :------------- | | Net cash used in operations | $(3.0) million | $(5.7) million | | Net cash used in investing | $(315,769) | $0 | | Net cash provided by financing | $136,789 | $1.6 million | Results of Operations (Fiscal year ended October 31, 2023, compared to fiscal year ended October 31, 2022) The Company's financial results for fiscal year 2023 showed a slight increase in revenues and a significant improvement in gross profit Revenues - The slight increase in revenues for FY2023 was primarily due to royalties received from PMPSA[258] Total Revenues (Fiscal Years Ended October 31) | Metric | 2023 (approx.) | 2022 (approx.) | | :------------ | :------------- | :------------- | | Total Revenues | $13.1 million | $12.8 million | Cost of Revenue, Net and Gross Profit (Loss) - The increase in gross profit for FY2023 was primarily driven by a decrease in the cost of revenue[259] Gross Profit and Cost of Revenue (Fiscal Years Ended October 31) | Metric | 2023 (approx.) | 2022 (approx.) | | :--------------- | :------------- | :------------- | | Gross Profit | $2.6 million | $1.2 million | | Total Cost of Revenue | $10.5 million | $11.5 million | Operating Expenses - Operating expenses decreased in FY2023, with notable changes in stock option compensation expense and professional fees[260] - The Company expects future operating expenses to increase to support planned business growth and increased sales[260] Total Operating Expenses (Fiscal Years Ended October 31) | Metric | 2023 (approx.) | 2022 (approx.) | | :--------------------- | :------------- | :------------- | | Total Operating Expenses | $13.2 million | $15.6 million | Income Taxes - The Company has federal net operating loss (NOL) carryforwards of approximately $23.8 million with an indefinite life[261] - The Company has state NOL carryforwards of approximately $186 thousand[261] - A valuation allowance of approximately $7.3 million was recorded for FY2023 to reduce the deferred tax asset[261] Net Loss - The decrease in net loss for FY2023 was attributed to changes in revenues and expenses[263] Net Loss and EPS (Fiscal Years Ended October 31) | Metric | 2023 (approx.) | 2022 (approx.) | | :----------------------------------- | :------------- | :------------- | | Net Loss | $(11.1) million | $(14.4) million | | Basic and Diluted Net Loss Per Share | $(4.13) | $(7.60) | Accrued Expenses Accrued Expenses (Fiscal Years Ended October 31) | Item | 2023 (approx.) | 2022 (approx.) | | :--------------------------------- | :------------- | :------------- | | QuikfillRx Quarterly Bonuses | $81,300 | $33,900 | | QuikfillRx Approved Expenses | $58,400 | $18,000 | | Excise Taxes | $5,800 | $6,600 | Concentrations - 100% of inventories were purchased from Bidi, a related party, amounting to approximately $12.8 million in FY2023[267] - As of October 31, 2023, the related party accounts payable balance for inventory purchases was $1.5 million[268] Revenue Concentration from Top Customers (FY2023) | Customer | Revenue (approx.) | % of Total Revenue | | :------------------- | :---------------- | :----------------- | | GPM Investments, LLC | $2.0 million | 15% | | H.T. Hackney Co | $1.8 million | 14% | | FAVS Business, LLC | $1.8 million | 14% | | C Store Master | $1.8 million | 13% | | QuikTrip Corporation | $1.5 million | 11% | Accounts Receivable Concentration from Top Customers (as of October 31, 2023) | Customer | Outstanding Balance (approx.) | % of Total AR | | :------------------- | :---------------------------- | :------------ | | FAVS Business LLC | $302,000 | 35% | | C Store Master | $301,000 | 35% | | QuikTrip Corporation | $165,000 | 19% | Cash and cash equivalents Cash and Cash Equivalents (as of October 31) | Year | Cash (approx.) | | :--- | :------------- | | 2023 | $0.5 million | | 2022 | $3.7 million | Critical Accounting Policies and Estimates - Revenue Recognition (ASC 606) is considered the most critical accounting policy, requiring management to make estimates and assumptions[274][275] - Revenue is recognized when a customer obtains control of promised goods, typically upon shipment or sale from consignment[276] Item 7A. Quantitative and Qualitative Disclosures about Market Risk As a smaller reporting company, this disclosure is not required Item 8. Financial Statements and Supplementary Data This section presents the Company's audited consolidated financial statements for fiscal years 2023 and 2022 Index to Financial Statements - This section provides a table of contents for the consolidated financial statements, including the auditor's report and accompanying notes[279] Report of Independent Registered Public Accounting Firm - MaloneBailey, LLP issued an unqualified opinion on the Company's consolidated financial statements for the years ended October 31, 2023 and 2022[284] - The report highlights a going concern matter, noting recurring losses and negative cash flows raise substantial doubt about the Company's ability to continue[285] Consolidated Balance Sheets - A significant increase in intangible assets in 2023 to $11.5 million was primarily due to the GoFire acquisition[291] - Cash decreased from $3.7 million in 2022 to $0.5 million in 2023[291] Consolidated Balance Sheet Highlights (as of October 31) | Metric | 2023 ($) | 2022 ($) | | :------------------------- | :----------- | :----------- | | Total Current Assets | 6,905,427 | 9,073,419 | | Total Assets | 19,385,006 | 12,437,034 | | Total Current Liabilities | 4,961,788 | 1,585,478 | | Total Liabilities | 5,827,995 | 2,636,254 | | Total Stockholders' Equity | 13,557,011 | 9,800,780 | Consolidated Statements of Operations - Royalty revenue significantly increased from $117,292 in 2022 to $780,929 in 2023[293] - Operating expenses decreased by approximately $2.4 million in 2023, contributing to a reduced net loss[293] Consolidated Statements of Operations Highlights (Fiscal Years Ended October 31) | Metric | 2023 ($) | 2022 ($) | | :------------------------- | :------------ | :------------ | | Total Revenues, net | 13,087,018 | 12,761,457 | | Gross Profit | 2,574,595 | 1,241,025 | | Total Operating Expenses | 13,238,496 | 15,629,681 | | Net Loss | (11,132,772) | (14,370,335) | | Net Loss Per Common Share | (4.13) | (7.60) | Consolidated Statements of Changes in Stockholders' Equity - Total Stockholders' Equity increased from $9.8 million in 2022 to $13.6 million in 2023, largely due to the issuance of stock for the GoFire acquisition[296] Changes in Stockholders' Equity (Fiscal Years Ended October 31) | Item | 2023 ($) | 2022 ($) | | :--------------------------------------- | :------------ | :------------ | | Balances, October 31, 2021 | 16,324,313 | 16,324,313 | | Stock Issued for Services - RSUs | — | 172,379 | | Common shares settled and cancelled | — | (59,862) | | Common stock issued for compensation | — | 65,323 | | Exercise of common stock warrants | — | 1,625,650 | | Converted Series A Convertible Preferred Stock | — | — | | Stock option expense | 3,168,430 | 6,043,312 | | Net loss | (11,132,772) | (14,370,335) | | Common shares issued for purchase of intangible assets | 1,119,800 | — | | Preferred series B shares issued for purchase of intangible assets | 9,047,980 | — | | Stock warrants issued for purchase of intangible assets | 1,264,396 | — | | Common shares issued for services | 51,510 | — | | Common shares issued for loan | 130,478 | — | | Stock warrant expense | 218,909 | — | | Preferred stock dividend | (112,500) | — | | Balances, October 31, 2023 | 13,557,011 | 9,800,780 | Consolidated Statements of Cash Flows - Operating cash flow improved in 2023, using less cash than in 2022, primarily due to changes in related-party receivables and payables[298] - Investing activities in 2023 included cash paid for equipment and transaction costs for the intangible asset acquisition[298] Consolidated Statements of Cash Flows Highlights (Fiscal Years Ended October 31) | Activity | 2023 ($) | 2022 ($) | | :----------------------- | :------------ | :------------ | | Net cash used in operating activities | (2,973,254) | (5,705,130) | | Net cash used in investing activities | (315,769) | — | | Net cash provided by financing activities | 136,789 | 1,565,788 | | Net change in cash | (3,152,234) | (4,139,342) | | Ending cash balance | 533,659 | 3,685,893 | Notes to Consolidated Financial Statements These notes provide detailed explanations of the Company's accounting policies, significant transactions, and financial position Note 1 – Organization and Description of Business - Kaival Brands Innovations Group, Inc. was incorporated in Delaware on September 4, 2018[301] - The Company entered an exclusive distribution agreement with Bidi Vapor, LLC (a related party) for ENDS products[302][306] - The Company formed Kaival Labs, Inc. for product development and Kaival Brands International, LLC (KBI) for international licensing with PMPSA[303][305] - FDA MDOs for non-tobacco flavored BIDI® Sticks were vacated by the 11th Circuit Court of Appeals in August 2022[309][313] - The FDA issued an MDO for the tobacco-flavored Classic BIDI® Stick on January 22, 2024, which Bidi is challenging[317] Note 2 – Basis of Presentation and Significant Accounting Policies - The consolidated financial statements include wholly-owned subsidiaries Kaival Labs and KBI, with intercompany transactions eliminated[320] - Revenue recognition follows ASC 606, recognizing revenue when customers obtain control of goods[330][333] - Royalty revenue from the PMI License Agreement is recognized in the period sales occur; the agreement was amended in August 2023[338][341][342] - Inventories are stated at the lower of cost (FIFO) and net realizable value; a full reserve of $381,512 was recognized for remaining "Classic" products[329][330] - The Company early adopted ASU 2020-06 (Accounting for Convertible Instruments) effective November 1, 2022, with no material impact[363] Note 3 – Going Concern - Substantial doubt exists about the Company's ability to continue as a going concern due to significant payables, negative cash flows, and regulatory uncertainties[367] - Management plans to increase marketing and sales efforts to generate revenue, but there is no assurance of success[368][369] Note 4 – Acquisition of GoFire Assets - Acquired certain intellectual property assets from GoFire, Inc. on May 30, 2023, consisting of 19 existing and 47 pending patents[371] - Consideration included 95,239 shares of Common Stock, 900,000 shares of Series B Convertible Preferred Stock, and a warrant[372] - The acquisition was accounted for as an asset acquisition, with purchased assets recorded at a cost of $11,795,975[374] Note 5 – Intangible Assets, net - Intangible assets, primarily from the GoFire acquisition, amounted to $11.8 million in cost as of October 31, 2023[377] - Amortizable patents and technology have a useful life of 15.0 years, with a weighted average remaining useful life of 14.6 years[377] Future Amortization Expense of Intangible Assets | Year | Amortization Expense ($) | | :---------- | :----------------------- | | 2024 | 786,398 | | 2025 | 786,398 | | 2026 | 786,398 | | 2027 | 786,398 | | 2028 | 786,398 | | Thereafter | 7,536,319 | | Total | 11,468,309 | Note 6 – Loans Payable - Entered into two collateralized loan agreements on May 9, 2023, totaling $800,000 in purchase price for $1,160,000 in purchased amount[380][382] - Obtained a Promissory Note for $650,000 principal from AJB Capital Investments, LLC on August 9, 2023[382] - Secured a nine-month loan from Westfield Bank on May 20, 2023, for $342,001 to finance D&O insurance[382] Note 7 – Leases - The Company capitalizes all leased assets with terms longer than 12 months as right-of-use (ROU) assets and lease liabilities[383] - Entered a Lease Agreement on June 10, 2022, with Just Pick, LLC (a related party) for office and warehouse space[386] Operating Lease Expenses (Fiscal Years Ended October 31) | Year | Operating Lease Expenses ($) | | :--- | :--------------------------- | | 2023 | 190,541 | | 2022 | 118,633 | Future Minimum Operating Lease Payments (as of October 31, 2023) | Year | Undiscounted Lease Payments ($) | | :---------- | :------------------------------ | | 2024 | 228,133 | | 2025 | 238,800 | | 2026 | 253,614 | | 2027 | 274,946 | | 2028 and thereafter | 175,989 | | Total | 1,171,482 | Note 8 – Stockholders' Equity - Issued 95,239 shares of Common Stock for the GoFire acquisition and 19,048 shares for a loan transaction in FY2023[389] - All 3,000,000 shares of Series A Preferred Stock were converted into 1,190,477 shares of Common Stock in June 2022[394] - Issued 900,000 shares of Series B Preferred Stock for the GoFire acquisition, which ranks senior to Common Stock[395] Stock Options Outstanding (as of October 31) | Metric | 2023 (shares) | 2022 (shares) | | :---------------------- | :------------ | :------------ | | Outstanding | 449,106 | 152,489 | | Exercisable | 185,496 | — | | Stock option expense | $3,168,430 | $6,043,312 | Warrants Outstanding (as of October 31) | Metric | 2023 (shares) | 2022 (shares) | | :---------------------- | :------------ | :------------ | | Outstanding | 242,548 | 110,396 | | Exercisable | 242,548 | 110,396 | | Stock warrant expense | $218,909 | $0 | Note 9 – Related-Party Transactions - 100% of product inventories were purchased from Bidi, a related party owned by Nirajkumar Patel, totaling $12.7 million in FY2023[430][435] - As of October 31, 2023, the Company had an accounts payable balance of $1.5 million to Bidi for inventory purchases[430][432][438] - The Company leases office and warehouse space from Just Pick, LLC, a related party owned by Nirajkumar Patel[433] Revenue from Related Parties (Fiscal Years Ended October 31) | Year | Revenue ($) | | :--- | :---------- | | 2023 | 10,828 | | 2022 | 68,139 | Note 10 – Income Tax - The Company has federal Net Operating Loss (NOL) carryforwards of approximately $23.8 million with an indefinite life[443] - The Company has state NOL carryforwards of approximately $186,000[443] - A valuation allowance of $7.3 million was recorded for FY2023 to reduce the deferred tax asset[443] Income Tax Expense (Benefit) (Fiscal Years Ended October 31) | Item | 2023 ($) | 2022 ($) | | :---------------- | :------- | :-------- | | Total Current Tax Expense | 2,348 | (18,317) | Note 11 – Commitments and Contingencies - The Company has no material commitments or contingencies as of October 31, 2023, other than those disclosed[444] - Consulting agreements include those with Russell Quick (CEO of QuikfillRx) and Oakhill Europe Ltd[445][447][448] - Executive compensation includes cash and equity bonus awards to Nirajkumar Patel and Eric Mosser[453][454] - The Service Agreement with QuikfillRx provides sales management, website development, and marketing services[459][460] Note 12 – Subsequent Events - A 1-for-21 reverse stock split became effective on January 25, 2024[462] - The Company repaid the $650,181 AJB Promissory Note in full on December 1, 2023[463] - Entered into two receivables purchase transactions on November 29, 2023, selling future receivables for $600,000 each[464][465][466] - Issued 16,667 shares of common stock to a FINRA member broker-dealer on December 15, 2023[467] - Barry M. Hopkins received a 10-year incentive stock option grant to purchase 63,881 shares of Common Stock on February 8, 2024[468] Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The Company reports no changes in or disagreements with its accountants Item 9A. Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were ineffective as of October 31, 2023 - Disclosure controls and procedures were not effective as of October 31, 2023[472] - Internal control over financial reporting was ineffective as of October 31, 2023, due to material weaknesses[474] - Identified material weaknesses include a lack of sufficient resources for segregation of duties and an underdeveloped formal review process[474] - Remediation measures are underway, contingent on additional financing[475] Item 9B. Other Information The Company has no other information to report under this item Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the Company PART III Item 10. Directors, Executive Officers and Corporate Governance This section provides an overview of the Company's leadership, corporate governance structure, and board composition Directors and Executive Officers - Nirajkumar Patel, Chief Science & Regulatory Officer, has extensive experience in pharmacy, chemistry, and business[482] - Barry M. Hopkins, Executive Chairman and Interim CEO, has over thirty years of experience with Altria and leadership roles at Turning Point Brands[483] Directors and Executive Officers (as of Report Date) | Name | Age | Position(s) | | :--------------- | :-- | :---------------------------------------------- | | Nirajkumar Patel | 40 | Chief Science & Regulatory Officer and Director | | Barry M. Hopkins | 72 | Executive Chairman, Interim CEO and President | | Roger Brooks | 78 | Director | | George Chuang | 55 | Director | | David Worner | 45 | Director | | Mark Thoenes | 70 | Director | | Stephen Sheriff | 34 | Chief Operating Officer and Investor Relations Officer | | Thomas Metzler | 47 | Chief Financial Officer, Treasurer, and Secretary | December 2023 Management Changes - Eric Mosser resigned as Chief Executive Officer and President on December 21, 2023, becoming a Senior Advisor to the Company[492][493] - Barry M. Hopkins was appointed Interim Chief Executive Officer and President on December 22, 2023[495] Executive Chairman Role - The Executive Chairman acts as the principal executive officer, providing advice on overall business management and strategic initiatives[496] - Responsibilities include defining strategic direction, chairing board meetings, and acting as a liaison between the board and officers[496][497][498][499][500] Family Relationships and Arrangements - No family relationships exist among any of the Company's directors or executive officers[501] - Arrangements for the Series B Director are described under "Description of Capital Stock-–-Preferred Stock—Series B Preferred Stock—Series B Director"[502] Directors and Executive Officers Qualifications - General qualities evaluated for officers and directors include educational background, professional experience, integrity, and independence[504] Director Independence - Messrs. Worner, Brooks, and Chuang are determined to be "independent" directors under Nasdaq listing rules[506] - All members of the Audit, Compensation, and Governance and Nominating Committees were independent during fiscal year 2023[507] Meetings of the Board and Board Committees - The Board met 10 times during fiscal 2023, with all directors attending at least 75% of meetings[508] - The Audit Committee met 4 times, overseeing accounting, financial reporting, and internal controls[509][511] - The Compensation Committee met 6 times and is responsible for executive and director compensation[512][513][514][515] - The Governance and Nominating Committee did not meet in fiscal 2023[516][517] Director Diversity Board Diversity Matrix (as of Report Date) | Category | Count | | :------------------------ | :---- | | Total Number of Directors | 6 | | Male | 6 | | African American or Black | 1 | | Asian | 2 | | White | 3 | Code of Ethics - The Company adopted a Code of Ethics and Business Conduct on March 17, 2021, applicable to all directors, officers, and employees[523] - The purpose is to enhance understanding of ethical business practices and promote awareness of ethical issues[523] Compensation Committee Interlocks and Insider Participation - None of the executive officers currently serve, or have served during the last year, on the board or compensation committee of any entity with interlocking directorates[524] Item 11. Executive Compensation This section details the compensation for the Company's named executive officers and directors for fiscal years 2023 and 2022 Summary Compensation Table Summary Compensation for Named Executive Officers | Name and Principal Position | Fiscal Year Ended Oct 31 | Salary ($) | Bonus ($) | Stock Awards ($) | Option Awards ($) | Non-Equity Incentive Plan Compensation ($) | Total ($) | | :-------------------------- | :----------------------- | :--------- | :-------- | :--------------- | :---------------- | :----------------------------------------- | :-------- | | Nirajkumar Patel | 2022 | 244,000 | 30,000 | 42,584 | 2,139,989 | 57,709 | 2,514,282 | | | 2023 | 276,000 | 0 | 0 | 364,994 | 0 | 640,994 | | Eric Mosser | 2022 | 226,577 | 20,000 | 37,707 | 1,854,991 | 57,709 | 2,196,984 | | | 2023 | 300,000 | 0 | 0 | 699,941 | 0 | 999,941 | | Mark Thoenes | 2022 | 347,201 | 0 | 0 | 310,998 | 0 | 658,193 | | | 2023 | 298,050 | 0 | 0 | 30,650 | 0 | 328,700 | | Thomas Metzler | 2023 | 61,076 | 0 | 0 | 150,000 | 0 | 211,076 | | Stephen Sheriff | 2022 | 31,250 | 0 | 0 | 29,000 | 0 | 60,250 | | | 2023 | 146,528 | 7,500 | 0 | 75,808 | 0 | 229,836 | Narrative Discussion - Nirajkumar Patel's base salary increased from $244,000 in FY2022 to $276,000 in FY2023[536] - Eric Mosser's base salary increased from $226,577 in FY2022 to $300,000 in FY2023[539] - Mark Thoenes, former Interim CFO, received consulting fees of $298,050 in FY2023 and $347,671 in FY2022[541] - Stock option awards were granted to named executive officers in FY2023 as partial compensation with varying exercise prices and vesting schedules[529][530][532][533][534][535] Outstanding Equity Awards at Fiscal Year-End October 31, 2023 Unvested Stock Options for Named Executive Officers (as of October 31, 2023) | Name | Number of Stock Options that Have Not Vested () | Market Value of Stock Options that Have Not Vested ($) | | :------------------------ | :----------------------------------------------- | :------------------------------------------------------- | | Nirajkumar Patel | 11,905 | 182,504 | | Eric Mosser | 38,909 | 517,650 | | Thomas Metzler | 12,092 | 150,064 | | Stephen Sheriff | 8,715 | 94,100 | Potential Payments Upon Termination or Change-of-Control - Named executive officers are not entitled to any payments upon termination or change-of-control, other than outstanding equity awards[543] Retirement or Similar Benefit Plans - No arrangements or plans are in place to provide retirement or similar benefits for named executive officers[544] Employment Agreements - Eric Mosser's employment agreement included an annual salary of $300,000; he resigned in December 2023[545] - Thomas Metzler's employment agreement as CFO includes an annual salary of $240,000 and an option to purchase 12,092 shares[546] - Stephen Sheriff's employment agreement as COO includes an annual salary of $225,000 and an option to purchase 7,524 shares[548] - Barry M. Hopkins' employment agreement as Executive Chairman includes an annual salary of $300,000 and an option to purchase 63,881 shares[550] - Employment agreements for Metzler, Sheriff, and Hopkins include at-will employment, clawback language, and specific severance terms[547][549][551] Director Compensation - Nirajkumar Patel, as a named executive officer, did not receive separate compensation for his service as a director in FY2023[554] Director Compensation (Fiscal Year 2023) | Name of Director | Fees Earned or Paid in Cash ($) | Option Awards ($) | Total ($) | | :--------------- | :------------------------------ | :---------------- | :-------- | | Paul Reuter | 100,000 | 91,249 | 191,249 | | Roger Brooks | 87,500 | 91,249 | 178,749 | | George Chuang | 87,500 | 91,249 | 178,749 | | Barry M. Hopkins | 37,500 | 108,749 | 146,249 | | David Worner | 37,500 | 108,749 | 146,249 | | James P. Cassidy | 16,667 | 0 | 16,667 | Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This section details the Company's equity compensation plans and the beneficial ownership of its common stock Securities Authorized for Issuance Under Equity Compensation Plans Equity Compensation Plan Information (as of FY2023 end) | Plan Category | Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights | Weighted Average Exercise and Grant Price of Outstanding Options, Warrants and Rights ($) | Number of Securities Remaining Available for Future Issuance | | :------------------------------------------------ | :---------------------------------------------------------------------------------------- | :---------------------------------------------------------------------------------------- | :----------------------------------------------------------- | | Equity compensation plans approved by security holders | 0 | 0 | 0 | | Equity compensation plans not approved by security holders | 2,044 | 377.58 | 6,713,749 | Plans Not Approved by Stockholders - The Incentive Plan, adopted in May 2020, aims to link compensation to stock price increases and performance[557][558] - The maximum aggregate number of shares available under the Incentive Plan is 4,761,905 shares[560] - Non-employee directors may not be granted awards exceeding 200,000 shares of Common Stock in any calendar year[561] Security Ownership of Certain Beneficial Owners and Management - Kaival Holdings, LLC, controlled by Nirajkumar Patel, is the largest beneficial owner with 67.36% of outstanding Common Stock[565][572] - Current Executive Officers and Directors as a Group beneficially own approximately 70.51% of the outstanding Common Stock[565] Beneficial Ownership of Common Stock (as of Report Date) | Name and Address | Amount and Nature of Beneficial Ownership (Common Stock) | Percentage of Class | | :--------------------------------------------------- | :------------------------------------------------------- | :------------------ | | Nirajkumar Patel | 1,976,248 | 69.43% | | Stephen Sheriff | 7,596 | * | | Roger Brooks | 6,746 | * | | George Chuang | 6,746 | * | | Barry M. Hopkins | 0 | * | | David Worner | 0 | * | | Mark Thoenes | 9,604 | * | | Thomas Metzler | 0 | * | | Current Executive Officers and Directors as a Group (8 Persons) | 2,006,940 | 70.51% | | Kaival Holdings, LLC | 1,917,400 | 67.36% | Item 13. Certain Relationships and Related Party Transactions This section details the Company's transactions with related parties, primarily Nirajkumar Patel and entities he controls Revenue - The Company recognized $10,828 in revenue during FY2023 from three companies owned by Nirajkumar Patel and/or his wife[573] Purchases and Accounts Payable - 100% of product inventories ($12.7 million in FY2023) were purchased from Bidi, a related party controlled by Nirajkumar Patel[574] - As of October 31, 2023, the Company had an accounts payable balance to Bidi of $1.5 million for inventory purchases[574][575] - The Company paid license fees of approximately $150,000 to Bidi in FY2023, representing 50% of adjusted earned royalty payments[575] Leased Office Space and Storage Space - The Company leases its principal office and warehouse space from Just Pick, LLC, a related party owned by Nirajkumar Patel[576] Receivables Purchase Arrangements - On November 29, 2023, the Company entered two receivables purchase transactions, selling future receivables for $600,000 each[577][578][579] - Obligations under both receivables purchase agreements are personally guaranteed by Eric Mosser, the Company's former CEO[578][579] Policies and Procedures for Related Party Transactions - The Company follows ASC 850 for related party disclosures, with transactions presented to the board for approval[580] Item 14. Principal Accounting Fees and Services This section outlines the fees billed by MaloneBailey, LLP for professional services rendered during fiscal years 2023 and 2022 Fees Billed Aggregate Fees Billed by MaloneBailey, LLP (Fiscal Years Ended October 31) | Fee Type | 2023 ($) | 2022 ($) | | :---------------- | :------- | :------- | | Audit and review fees | 286,725 | 195,000 | | Audit-related fees | — | 10,000 | | Tax fees | — | — | | All other fees | — | — | | Total | 286,725| 205,000| Pre-Approval Policies and Procedures - The Audit Committee reviews and pre-approves the independent auditors' annual engagement letter and all audit and non-audit services[583] - The Audit Committee may not engage independent auditors to perform non-audit services prohibited by law or regulations[583] PART IV Item 15. Exhibits, Financial Statement Schedules This section lists the financial statements, schedules, and exhibits included in or filed with the report - Financial statements are listed under Item 8 of the document[585] - All financial statement schedules are omitted as not applicable, not material, or the information is shown in the financial statements[585] - The section includes a list of exhibits required by Item 601 of Regulation S-K, such as corporate governance documents and material agreements[586][588][589][590][591][592] Item 16. Form 10-K Summary The Company does not provide a summary for Form 10-K Signatures This section contains the signatures of the Company's authorized representatives certifying the report's submission - The report is signed by Barry M. Hopkins (Executive Chairman, Interim CEO), Thomas Metzler (CFO), Nirajkumar Patel (CSRO), and other Directors[598][599]