The accompanying notes are an integral
part of these unaudited consolidated financial statements.
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 (“ENDS”) 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 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.
On July 16, 2021, the Company filed
a Certificate of Amendment to the Amended and Restated Certificate of Incorporation with the Secretary of State of the State of
Delaware to effect a 1-for-12 reverse stock split (the “Reverse Stock Split”) of the shares of the Company’s
common stock, par value $0.001 per share (the “Common Stock”). The Reverse Stock Split was effective as of 12:01 a.m.
Eastern time on July 20, 2021. No fractional shares were issued in connection with the Reverse Stock Split. Any fractional shares
of Common Stock that would have otherwise resulted from the Reverse Stock Split will be rounded up to the nearest whole number.
In connection with the Reverse Stock Split, the Board of Directors (the “Board”) approved appropriate and proportional
adjustments to all outstanding securities or other rights convertible or exercisable into shares of Common Stock, including, without
limitation, all preferred stock, warrants, options, and other equity compensation rights. All historical share and per-share amounts
reflected throughout our consolidated financial statements and other financial information in this Quarterly Report have been adjusted
to reflect the Reverse Stock Split as if the split occurred as of the earliest period presented. The par value per share of the
Common Stock was not affected by the Reverse Stock Split.
COVID-19 Impact
In January 2020, the World
Health Organization (the “WHO”) announced a global health emergency because of a new strain of coronavirus (“COVID-19”)
originating in Wuhan, China and the risks to the international community as the virus spread globally beyond its point of origin. In March
2020, the WHO classified the COVID-19 outbreak as a pandemic based on the rapid increase in global exposure.
The Company’s 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 the Company’s
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. The Company was also indirectly impacted by supply chain issues and regulatory oversight.
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.
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 July 31, 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:
Schedule of assumptions used
|
|
|
|
|
|
|
|
|
|
|
|
2021
|
|
|
|
2020
|
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
—
|
|
Expected option term (years)
|
|
|
10
|
|
|
|
—
|
|
Expected volatility
|
|
|
294.57%-301.53
|
%
|
|
|
—
|
|
Risk-free interest rate
|
|
|
1.19%-1.63
|
%
|
|
|
—
|
|
The expected
term of options granted represents the period of time that options granted are expected to be outstanding. The expected volatility
was based on the volatility in the trading of the Common Stock. The assumed discount rate was the default risk-free five-year interest
rate for US Treasury bills.
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 5
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 July 31, 2021, the right-to-use (“ROU”) lease asset, net of
accumulated amortization, was $59,246.
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 nine months ended July 31, 2021 was $10,887
and three payments on the ROU liability were $8,547.
At July 31, 2021, short-term ROU lease liability was $12,691
and long-term liability was $49,675,
totaling $62,366. Operating
lease expense totaling $11,000
for November 1, 2020 until July 2021 was accrued at July 31, 2021.
Schedule of Future Minimum Rental Payments for Operating Leases
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2021
|
|
2022
|
|
2023
|
|
2024
|
|
Total
|
Lease payments
|
|
$
|
12,300
|
|
|
$
|
13,500
|
|
|
$
|
15,300
|
|
|
$
|
18,000
|
|
|
$
|
13,500
|
|
|
$
|
72,600
|
|
Less discount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,887
|
)
|
Present value of future payments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62,336
|
|
Less current obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,691
|
)
|
Long term lease obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
49,675
|
|
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. As a result of the Reverse Stock Split, the conversion rate was adjusted such that each share
of the Series A Preferred Stock are convertible into approximately 8.33 shares of Common Stock. All 3,000,000 shares of Series
A Preferred Stock were issued and outstanding as of July 31, 2021.
Common Shares Issued
The Company implemented the Reverse
Stock Split, effective prior to the opening of the market on Tuesday, July 20, 2021. The Reverse Stock Split was implemented by
the Company in support of its application to list on the Nasdaq Capital Market (“Nasdaq”). As a result of the Reverse
Stock Split at the 1-for-12 ratio, every 12 shares of the Common Stock was exchanged for one share of the Common Stock. The Company has retroactively adjusted all share amounts and per share
data herein to give effect to the Reverse Stock Split.
The authorized Common Stock of the Company
consists of 1,000,000,000 shares with a par value of $0.001. As a result of the Reverse Stock Split, effective July 20, 2021, and
the issuance of RSUs (as defined below) during May 2021 there were 23,600,597 shares of Common Stock issued and outstanding as
of July 31, 2021.
Restricted Stock Unit Awards
During the nine months ended July 31,
2021, 165,416 shares of Common Stock were issued to eight employees of the Company pursuant to restricted stock unit (“RSU”)
agreements, resulting in $740,695 of share-based compensation. Of the shares issued to employees, 60,758 shares were withheld by
the Company to satisfy tax withholding obligations equal to $201,688.
During the nine months ended July 31,
2021, 389,053 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 issuance dates to compute an aggregate fair market value total of $7,529,151.
Stock Options
During the nine months July 31, 2021,
the Company granted options exercisable for up to 150,000 shares of Common Stock of which 41,667 fully vested on December 1, 2021,
15,000 fully vested on March 17, 2021, 7,500 fully vested on June 30, 2021, 68,333 vest over the next 2 years on March 17, 2022,
and 2023, and 17,500 vest over the next 2 years on June 30, 2022 and 2023. The options have exercise prices ranging from $9.12
to $28.68 per share. These options have a weighted average remaining life of 9.62 years as of July 31, 2021 and expire in the year
2031. On July 19, 2021, two of the stock option agreements, exercisable for an aggregate of 50,000 shares of Common Stock, were modified to accelerate the full vesting
period from 3 years to 2 years. The aggregate intrinsic value of these outstanding options as of July 31, 2021 was $0.
The Company fair valued the options on
the grant date at $3,088,002 using
a Black-Scholes option pricing model with the following assumptions: stock price range of $9.12 to
$27.36 per
share (based on the quoted trading price on the date of grant), volatility range of 294.57% to 301.53%,
expected term of 10 years,
and a risk-free interest rate range of 1.19%
to 1.63%.
The Company is amortizing the expense over the vesting terms of each. The total stock option expense for the nine months ended July
31, 2021 was $1,268,210.
The total unamortized stock option expense at July 31, 2021 was $1,819,792.
Note 5 – Related-Party Transactions
Revenue and Accounts Receivable
During the nine months ended July 31,
2021, the Company recognized revenue of $132,145 from three companies owned by Nirajkumar Patel, the Chief Executive Officer of
the Company, and/or his wife.
During the nine months ended July 31, 2021, Lakshmi
Distributors Inc., doing business as C Store Master (“C Store Master”), a large customer of the Company, elected to return
the inventory associated with the consignment order placed on April 1, 2021, which was located at the staging warehouse in California,
to the Company at no cost. The Company then returned this same inventory to Bidi’s warehouse in Florida at no cost. This reduced
the Company’s inventory and reduced the related-party amount due to Bidi Vapor by $13,846,950.
Purchases and Accounts Payable
During the nine months ended July 31,
2021, the Company purchased Products equal to $62,394,093 from Bidi, a related party company that is also owned by Nirajkumar Patel,
the Company’s Chief Executive Officer. As of July 31, 2021, the Company had accounts payable to Bidi of $16,813,962 and products
valued at $14,947,200 were held in inventory at July 31, 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.
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 nine months ended July 31, 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, in the amount
of $62,394,093. It also accounted for 100% of the total accounts payable-related party and 99.3% of the total accounts payable
of the Company as of July 31, 2021. Products valued at $14,947,200 were held in inventory at July 31, 2021.
Concentration of Revenues and
Accounts Receivable
For the nine months ended July 31, 2021, approximately
30%,
or $18,435,648,
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 $9,598,426,
of the revenue from the sale of Products was generated from MMS Distributing, LLC (“MMS Distro”), approximately 13%,
or $7,663,490,
of the revenue from the sale of Products was generated from C Store Master, and approximately 8%,
or $4,648,659,
of the revenue from the sale of Products was generated by GPM Investment, LLC (“GPM Investment”).
Favs Business, C Store Master, MMS Distro
and GPM Investment had outstanding balances of $6,641,912,
$545,879,
$255,620
and $178,756,
respectively, accounted for approximately 85%, 7%, 3%
and 2%,
respectively, of the total accounts receivable from customers as of July 31, 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 July 31, 2021 and July 31, 2020 other than the below:
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 has completed 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.
On May 28, 2020, the Board 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 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 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 approved an award of 7,500 restricted
shares of the 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 6,250 restricted shares of the 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 13,750 shares, or $70,785, and the cash bonuses
totaling $100,000 should be accrued at January 31, 2021.
During the three and nine months ended
July 31, 2021 additional revenue targets were not achieved and no related bonuses were accrued.
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 $40,283 for
a quarterly bonus payable to QuikfillRx, based on the Applicable Gross Quarterly Sales results of the three months ended July 31,
2021.
On March 17, 2021 the Company entered
into a consulting agreement with Russell Quick which granted stock options to purchase 41,667 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 $28.68. The Company recognized $190,000 in expense to account for the stock options. Russell
Quick is the Chief Executive Officer of QuikfillRx.
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 nine months ended July 31,
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 July 31, 2021 and October 31, 2020 after applying enacted corporate income
tax rate, is net operating loss carryforward of $721,771
and $15,377,
respectively, and a valuation allowance of $721,771
and $15,377,
respectively, which is a total deferred tax asset of $737,148.
The Company’s tax returns for 2018 and 2019 remain open to examination.
Note 9 – Subsequent Events
Share-based
Compensation
On
August 8, 2021, the Company issued 56,250 shares of Common Stock to eight employees in accordance with the vesting schedules set
forth in RSU agreements previously entered into with such employees, resulting in the recognition of $352,137 of share-based compensation.
Of the shares issued to employees, 28,660 shares were withheld by the Company to satisfy tax withholding obligations and/or satisfy
cash settlement options to employees, equaling $179,412.