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 ENDS and related components (the “Products”)
manufactured by 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, which
Distribution Agreement was amended and restated on May 21, 2020 and again on April 20, 2021 (collectively, the “A&R Distribution
Agreement”). 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.” The Company ceased all retail/direct-to-consumer sales in February 2021. Subsequent
to April 30, 2022, the Company entered into a third amended and restated exclusive distribution agreement (the “Third A&R Distribution
Agreement”). For additional information, see Note 8, Subsequent Events.
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 March 11, 2022, the Company formed Kaival Brands International, LLC, a Delaware limited
liability company (herein referred to as “KBI”), as a wholly owned subsidiary of the Company.
On
July 16, 2021, the Company filed a Certificate of Amendment to the Restated Certificate of Incorporation, as amended, 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 were 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.
Current
Product Offerings
Pursuant
to the A&R Distribution Agreement, the Company sells and resells electronic nicotine delivery systems, which it may refer to
herein as “ENDS Products”, or “e-cigarettes”, to non-retail level customers. The sole Product the Company
resells is the “BIDI® Stick,” a disposable, tamper-resistant ENDS product that comes in a variety of flavor
options for adult cigarette smokers. The Company does not manufacture any of the Products it resells. The BIDI® Stick
is manufactured by Bidi. Pursuant to the terms of the A&R Distribution Agreement, Bidi provides the Company with all branding,
logos, and marketing materials to be utilized by the Company in connection with its marketing and promotion of the Products.
On
July 14, 2021, the Company announced plans to launch its first Kaival-branded product, a Hemp CBD product. In addition to its
branded formulation, the Company anticipates that it will also provide white label, wholesale solutions for other product manufacturers
through its subsidiary, Kaival Labs. The Company has not yet launched any branded product, nor has it begun to provide white label
wholesale solutions for other product manufacturers. |
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 directly impacted by COVID-19. 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. No impairments have been recorded and no triggering events or changes in circumstances had occurred. While the
spread of COVID-19 has slowed and social restrictions have been largely lifted, the full impact of the COVID-19 pandemic continues
to evolve and remains uncertain, particularly as new variants of the virus emerge. 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.
Impact
of the FDA PMTA Decision
As
of March 2022, the FDA announced that it has taken action on over 99% of applications and issued Marketing Denial Orders (“MDOs”)
for more than 1,167,000 non-tobacco flavored ENDS products, while issuing zero marketing authorizations for such products.
Bidi, along with nearly every other company in the
ENDS industry, received a MDO for its non-tobacco flavored ENDS products. With respect to Bidi, the MDO covered all non-tobacco flavored
BIDI® Sticks, including its Arctic (menthol) BIDI® Stick. As a result, beginning in September 2021, Bidi
pursued multiple avenues to challenge the MDO. First, on September 21, 2021, separate from the judicial appeal of the MDO in
its entirety, Bidi filed a 21 C.F.R. § 10.75 internal FDA review request specifically of the decision to include the Arctic (menthol)
BIDI® Stick in the MDO. In May 2022, the FDA issued a determination that it views the Arctic BIDI® Stick
as a flavored ENDS product.
On September 29, 2021, Bidi petitioned the U.S. Court
of Appeals for the Eleventh Circuit to review the FDA’s denial of the PMTAs for its non-tobacco flavored BIDI® Stick
ENDS, arguing that it was arbitrary and capricious under the Administrative Procedure Act (“APA”), as well as ultra vires,
for the FDA not to conduct any scientific review of Bidi’s comprehensive applications, as required by the Tobacco Control Act (“TCA”),
to determine whether the BIDI® Sticks are “appropriate for the protection of the public health”. Bidi further
argued that the FDA violated due process and the APA by failing to provide fair notice of the FDA’s new requirement for ENDS companies
to conduct long-term comparative smoking cessation studies for their flavored products.
Finally,
on October 14, 2021, Bidi requested that the FDA re-review the MDO and reconsider its position that Bidi did not include certain scientific
data in its applications sufficient to allow the PMTAs to proceed to scientific review. In light of this request, on October 22, 2021,
pursuant to 21 C.F.R. § 10.35(a), the FDA issued an administrative stay of Bidi’s MDO pending its re-review. Subsequently,
the FDA lifted its administrative stay on December 17, 2021. Following the lifting of the FDA’s administrative stay, Bidi filed
a renewed motion to stay the MDO with the U.S. Court of Appeals for the Eleventh Circuit, which was granted on February 1, 2022.
On February 1, 2022, the U.S. Court of Appeals for
the Eleventh Circuit granted Bidi’s motion to stay (i.e., put on hold) the MDO, pending the litigation on the merits. The
court-ordered stay means that the MDO is not legally in force. Accordingly, we anticipate being able to continue marketing and selling
the Products, subject to the FDA’s enforcement discretion, while Bidi continues with its merits case challenging the legality of
the MDO. The FDA has indicated that it is prioritizing enforcement against companies that have not submitted PMTAs, whose PMTAs have been
refused acceptance or filing by the FDA, or whose PMTAs remain subject to MDOs. Oral arguments in the merits-based proceeding were held
on May 17, 2022.
In
the event that the U.S. Court of Appeals for the Eleventh Circuit issues a ruling adverse to Bidi, or if the FDA otherwise chooses to
enforce the MDO against Bidi, Bidi will be forced to cease the continued sale of its non-tobacco flavored BIDI® Stick
products in the United States, thereby resulting in the Company being unable to distribute such products, and the Company’s business
and financial condition would be materially adversely affected. The Company cannot provide any assurances as to the timing or outcome
of the merits-based case.
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 subsidiaries, Kaival Labs, Inc.
and Kaival Brands International, LLC. 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 16, 2022 (the “2021 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 2021 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.
Cash
and Restricted Cash
The
Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents.
There were no cash equivalents at April 30, 2022 and October 31, 2021. Cash and restricted cash at April 30, 2022 and October 31, 2021
were $4,727,037 and $7,825,235, respectively.
Restricted
cash consists of cash held in short-term escrow as required. As of April 30, 2022, and October 31, 2021, the Company had $65,542
and $65,007
in restricted cash, respectively, for amounts held in escrow.
The
following table sets forth a reconciliation of cash, and restricted cash reported in the consolidated balance sheet and the consolidated
statements of cash flows that agrees to the total of those amounts presented in the consolidated statements of cash flows.
| Restrictions on Cash and Cash Equivalents | |
| | | |
| | |
| | |
April 30,
2022 | |
October 31, 2021 |
| Cash | |
$ | 4,661,495 | | |
$ | 7,760,228 | |
| Restricted cash | |
| 65,542 | | |
| 65,007 | |
| Total cash and restricted cash shown in statement of cash flows | |
$ | 4,727,037 | | |
$ | 7,825,235 | |
Advertising
and Promotion
All
advertising, promotion and marketing expenses, including commissions, are expensed when incurred.
Accounts
Receivable and Allowance for Doubtful Accounts
Receivables
are stated at cost, net of an allowance for doubtful accounts. The Company establishes an allowance for doubtful accounts based on management’s
assessment of the collectability of accounts receivables. A considerable amount of judgment is required in assessing the amount of the
allowance and the Company considers the historical level of credit losses and collection history and applies percentages to aged receivable
categories. The Company makes judgments about the creditworthiness of debtors based on ongoing credit evaluations and monitors current
economic trends that might impact the level of credit losses in the future. If the financial condition of the debtors were to deteriorate,
resulting in their inability to make payments, a larger allowance may be required. As of April 30, 2022, based upon management’s
assessment of the accounts receivable aging and the customers’ payment history, the Company has determined that no allowance for
doubtful accounts was required. As of October 31, 2021, the Company also determined that no allowance for doubtful accounts was required.
Inventories
Inventories
are stated at the lower of cost and net realizable value. Cost includes all costs of purchase and other costs incurred in bringing the
inventories to their present location and condition. The Company determines cost based on the FIFO method. Net realizable value is the
estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to
make the sale. All inventories (i) were purchased from Bidi, a related party, as of October 31, 2021 and April 30, 2022, (ii) only consisted
of finished goods, (iii) were significant, and (iv) were located in three storage warehouses: (1) the primary leased warehouse, which
is owned by a related party, Just Pick, LLC (“Just Pick”), (2) a customer/sub distributor warehouse, which is owned by Favs
Business LLC (“Favs Business”), and (3) a third-party logistics services warehouse, which is owned by Ranger Enterprises,
LLC (“Ranger”). Based upon fiscal year 2021 inventory management procedures and their results, that have continued through
the quarter ended April 30, 2022, the Company has determined that no allowance for the inventory valuation was required at April 30,
2022, nor October 31, 2021.
Inventory
deposit related party
In the fourth quarter of fiscal
2021, the Company placed an order for BIDI® Sticks in anticipation of the distribution launch in the United Kingdom. In
connection with this order, the Company paid $2,925,000 from its capital financing raise to Bidi, a related party, in advance to have
the BIDI® Sticks manufactured in compliance with the regulatory product requirements in the United Kingdom, which differs
from the regulatory product requirements in the United States. The parties originally contemplated that delivery of the BIDI®
Sticks to the Company would occur by the end of April 2022. On April 29, 2022, the Company and Bidi agreed to cancel the order due
to an internal change of approach to international distribution, and Bidi agreed to credit the $2,925,000 against the accounts payable
balance owed by the Company to Bidi. As of April 30, 2022, the Company has on its balance sheet a zero balance for inventory deposits
and inventory deposits related party.
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. Under ASC 606, disaggregated revenue from
contracts with customers depicts the nature, amount, timing, and uncertainty of revenue and cash flows affected by economic factors.
On October 31, 2021, the Company and one of its customers, Favs Business, entered into a Consignment Agreement. As of October 31, 2021,
the value of the Products stored at Favs Business under the Consignment Agreement was approximately $2,556,930. As of April 30, 2022,
the value of the Products stored at Favs Business under the Consignment Agreement was approximately $1,433,730.
Deferred
Revenue
The
Company accepts partial payments for orders from wholesale customers, which it holds as deposits or deferred revenue, until the Company
has received full payment and orders are shipped to the customer. Revenue for these orders is recognized at time of shipment to the customer.
As of April 30, 2022, the Company had received $2,382 in deposits from customers, included with the Company’s current liabilities.
As of October 31, 2021, the Company had not received any deposits from customers.
Customer
Refunds
The
Company infrequently has a need to adjust the size of an order after it has been shipped, received, and paid for, due to the customer
oversizing the order for more product that it can realistically sell at that time. If and when this occurs, the Company will ask the
customer to return the over allotted Products. Once received and inspected, the Company will issue a refund for the Product return. As
of April 30, 2022 and October 31, 2021, the Company had customer refunds due in the amounts equal to approximately $0 and $316,800, respectively,
which refund was the result of one of the Company’s sub-distributor customers returning Products that had become defective in storage.
Products
Revenue
The
Company generates 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 determines 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’s sales arrangements for retail sales usually require
full prepayment before delivery of the Products. The advance payment is not considered a significant financing component because the
period between when the Company transfers a promised good to a customer and when the customer pays for that good is short. The Company
offers credit sales arrangements to non-retail (or wholesale) customers and monitors the collectability of each credit sale routinely.
Revenue
is measured by the transaction price, which is defined as the amount of consideration expected to be received in exchange for providing
goods to customers. The transaction price is adjusted for estimates of known or expected variable consideration, which includes refunds
and returns as well as incentive offers and promotional discounts on current orders. Estimates for sales returns are based on, among
other things, an assessment of historical trends, information from customers, and anticipated returns related to current sales activity.
These estimates are established in the period of sale and reduce revenue in the period of the sale. Variable consideration related to
incentive offers and promotional programs are recorded as a reduction to revenue based on amounts the Company expects to collect. Estimates
are regularly updated and the impact of any adjustments are recognized in the period the adjustments are identified. In many cases, key
sales terms such as pricing and quantities ordered are established at the time an order is placed and incentives have very short-term
durations.
Amounts
billed and due from customers are short term in nature and are classified as receivables since payments are unconditional and only the
passage of time related to credit terms is required before payments are due. The Company does not grant payment financing terms greater
than one year. Payments received in advance of revenue recognition are recorded as deferred revenue.
Concentration
of Revenues and Accounts Receivable
For
the six months ended April 30, 2022, approximately 40%, or $2,366,200,
of the revenue from the sale of Products was generated from Favs Business, and approximately 15%, or $877,264,
of the revenue from the sale of Products was generated from The H.T. Hackney Company.
Favs Business had an outstanding balance of approximately
$305,430, which accounted for approximately 26% of the Company’s total accounts receivable from customers as of April 30, 2022.
The H.T. Hackney Company had an outstanding balance of approximately $297,629, which accounted for approximately 25% of the Company’s
total accounts receivable from customers as of April 30, 2022. Grocery Supply Warehouse had an outstanding balance of $163,163,
which accounting for approximately 14% of the Company’s total accounts receivable from customers as of April 30, 2022. Finally,
MMS Distribution, LLC (“MMS Distro”) had an outstanding balance of approximately $116,444, which accounted for approximately
10% of the Company’s total accounts receivable from customers as of April 30, 2022.
For
the six months ended April 30, 2021, approximately 33%, or $18,129,136, of the revenue from the sale of Products was generated from Favs
Business, approximately 16%, or $9,069,455, of the revenue from the sale of Products was generated from MMS
Distro, and approximately 12%, or $6,820,132, of the revenue from the sale of Products was generated from C Store Master (“C
Store Master”).
Favs
Business, with an outstanding balance of approximately $8,590,200, and GPM Investment, LLC, with an outstanding balance of approximately
$2,482,553, accounted for approximately 47% and 14% of the total accounts receivable from customers, respectively, as of April 30, 2021.
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 fiscal six-month period ended April 30, 2022 and at October 31, 2021 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 Share-based Payment Award, Stock Options, Valuation Assumptions | |
| | | |
| | |
| | |
As of April 30, 2022 | |
As of October 31, 2021 |
| Expected dividend yield | |
| 0 | % | |
| 0 | % |
| Expected option term (years) | |
| 10 | | |
| 10 | |
| Expected volatility | |
| 294.55%-301.53 | % | |
| 294.55%-301.53 | |
| Risk-free interest rate | |
| 1.19%-1.62 | % | |
| 1.19%-1.62 | % |
The
expected term of options granted represents the period of time that options granted are expected to be outstanding. The expected volatility
was based on the volatility in the trading of the Common Stock. The assumed discount rate was the default risk-free ten-year interest
rate for U.S. Treasury bills. The Company’s stock option expense for the fiscal three and six months ended April 30, 2022 was $2,616,193
and $2,925,892,
respectively.
The
Company’s stock-based compensation for the fiscal three and six months ended April 30, 2022 was $110,189
and $190,416,
respectively.
Income
Tax
Income
taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred
taxes related primarily to differences between the recorded book basis and the tax basis of assets and liabilities for financial and
income tax reporting. Deferred tax assets and liabilities represent the future tax return consequences of those differences, which will
either be taxable or deductible when the assets and liabilities are recovered or settled. Deferred taxes are also recognized for operating
losses that are available to offset future taxable income and tax credits that are available to offset future federal income taxes. The
Company believes that its income tax filing positions and deductions will be sustained on audit and does not anticipate any adjustments
that will result in a material adverse effect on the Company’s financial condition, results of operations, or cash flow.
The
Company has Federal net operating loss (“NOL”) carryforwards of approximately $4,000,000 and state NOL carryforwards of approximately
$1,800,000. With the changes instituted by the CARES Act, the Federal NOLs have an indefinite life and will not expire. The Company’s
federal and state tax returns for the 2018 and 2019 tax years generally remain subject to examination by U.S. and various state authorities.
A valuation allowance is recorded to reduce the deferred tax asset if, based on the weight of the evidence, it is more likely than not
that some portion or all of the deferred tax asset will not be realized. After evaluation of the evidence, management determined that
a valuation allowance of approximately $1,256,059 for the year ended on October 31, 2021, and the fiscal six-month period ended April
30, 2022, is necessary to reduce the deferred tax asset to the amount that will more likely than not be realized pursuant to ASU 2019-12,
Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.
The Company has completed its federal and state tax
returns for the 2020 tax year and intends on filing them shortly. Given the federal and state NOLs, the Company anticipates that its 2020
tax returns will report that it is eligible to apply those NOLs against the federal and state taxes it paid in 2019. The Company anticipates
federal and state tax refunds of approximately $1,600,000 and $146,000, respectively, and expects to collect the refunds in the current
fiscal year.
During the six months ended April 30, 2022, the Company
generated no taxable income and, thus, no federal or state income taxes are accrued for fiscal year 2022.
Fair
Value of Financial Instruments
The
Company’s balance sheet includes certain financial instruments. The carrying amounts of current assets and current liabilities
approximate their fair value because of the relatively short period of time between the origination of these instruments and their expected
realization.
ASC
820, Fair Value Measurements and Disclosures (“ASC 820”), defines fair value as the exchange price that would
be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or
liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy
that distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable
inputs) and (2) an entity’s own assumptions about market participant assumptions developed based on the best information available
in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority
to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs
(Level 3). The three levels of the fair value hierarchy are described below:
| ● |
Level
1 – Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets
or liabilities. |
| ● |
Level
2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly
or indirectly, including quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar
assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability
(e.g., interest rates); and inputs that are derived principally from or corroborated by observable market data by correlation or
other means. |
| ● |
Level
3 - Inputs that are both significant to the fair value measurement and unobservable. |
Fair
value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of April
30, 2022. The respective carrying value of certain on-balance-sheet financial instruments approximated their fair values due to the short-term
nature of these instruments. These financial instruments include cash, restricted cash, accounts receivable, inventory, accounts payable
and accrued expenses.
Recent
Accounting Pronouncements
The
Company does not believe that any recently issued effective pronouncements, or pronouncements issued but not yet effective, if adopted,
would have a material effect on the accompanying financial statements.
Note
3 – Going Concern
In February 2022, the U.S. Court of Appeals for the
Eleventh Circuit granted Bidi a judicial stay of the MDO previously issued by the FDA. The ruling means that the MDO is not legally in
force pending the outcome of litigation on the merits of Bidi’s challenge to the MDO. Accordingly, we anticipate being able to continue
marketing and selling the Products, subject to the FDA’s enforcement discretion, while Bidi continues with its merits case challenging
the legality of the MDO. The FDA has indicated that it is prioritizing enforcement against companies that have not submitted PMTAs, whose
PMTAs have been refused acceptance or filing by the FDA, or whose PMTAs remain subject to MDOs. Oral arguments in the merits case were
held on May 17, 2022.
If the U.S. Court of Appeals for the Eleventh Circuit
rules in Bidi’s favor in the merits case, the Company anticipates that the FDA will be compelled to place the non-tobacco flavored
ENDS back into the PMTA scientific review process. If this is the outcome of the merits case, the Company anticipates being able to continue
marketing and selling the Products, subject to the FDA’s enforcement discretion, until the scientific review process is complete
on each of Bidi’s PMTA for non-tobacco flavored ENDS and the FDA issues its decision on each.
If the U.S. Court of Appeals for the Eleventh Circuit
does not rule in Bidi’s favor on the merits case, if the FDA re-issues the MDO after completing its scientific review process for
each of Bidi’s PMTAs for its non-tobacco flavored ENDS, or if the FDA otherwise chooses to enforce the MDO against Bidi, the Company
will be forced to cease sales of the non-tobacco flavored BIDI® Sticks in the United States market, leaving only the Tobacco
(Classic) BIDI® Sticks for sale in the United States. If this is the outcome of the merits case, this combined with a
negative cash flow from operations, raises substantial doubt on our ability to continue as a going concern.
Management plans to continue similar operations with
increased marketing, which the Company believes will result in increased revenue and net income. Further, after the end of the three and
six months ended April 30, 2022, the Company’s wholly owned subsidiary, KBI, entered into an international licensing agreement with
PMPSA, which the Company expects will generate additional revenues. However, there is no assurance that management’s plan will be
successful due to the current economic climate in the United States and globally.
These
consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded assets,
or the amounts and classification of liabilities that might be necessary in the event that we cannot continue as a going concern.
Note
4 – Leases
The
Company capitalizes all leased assets pursuant to ASU 2016-02, Leases (Topic 842) (“Topic 842”), which requires lessees
to recognize right-of-use (“ROU”) 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
excludes short-term leases having initial terms of 12 months or less from Topic 842 as an accounting policy election and recognizes rent
expense on a straight-line basis over the lease term. The Company adopted the standard in the fourth quarter of fiscal year 2020. The
adoption of Topic 842 did not have any impact on the Company’s previously reported financial statements in any prior period nor
did it result in a cumulative effect adjustment to retained earnings. The Company does not have financing
leases and only one operating lease for office space, with a related party. Certain of the Company’s leases include renewal options
and have not been included in the calculation of the lease liabilities and right of use assets as the Company is not reasonably certain
to exercise the option.
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. 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. 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 April 30, 2022 and October 31, 2021, the ROU lease asset, net of accumulated amortization, was approximately $48,299
and $55,604,
respectively. The initial recognition of the ROU operating lease was approximately $73,749
for both the ROU asset and ROU liability. The amortization expense for ROU asset for the twelve months ended October 31, 2021 was
approximately $14,529
and no payments were made on the ROU liability. The amortization expense for the ROU asset for the six months ended April 30, 2022
was approximately $7,305
and resulted in a change in the ROU liability. At October 31, 2021, short-term ROU lease liability was approximately $13,020
and long-term liability was approximately $46,185,
totaling approximately $59,205.
At April 30, 2022, short-term ROU lease liability was approximately $13,680
and long-term liability was approximately $39,180
totaling approximately $52,860.
| Schedule of Future Minimum Rental Payments for Operating Leases | |
| | | |
| | | |
| | | |
| | | |
| | |
| | |
2022 | |
2023 | |
2024 | |
2025 | |
Total |
| Lease payments | |
$ | 13,400 | | |
$ | 15,000 | | |
$ | 18,000 | | |
$ | 15,000 | | |
$ | 61,400 | |
| Less discount imputed interest | |
| | | |
| | | |
| | | |
| | | |
| (8,540 | ) |
| Present value of future payments | |
| | | |
| | | |
| | | |
| | | |
| 52,860 | |
| Less current obligations | |
| | | |
| | | |
| | | |
| | | |
| (13,680 | ) |
| Long term lease obligations | |
| | | |
| | | |
| | | |
| | | |
$ | 39,180 | |
Storage
Space
On
November 1, 2021, the Company entered into a month-to-month lease agreement with Ranger Enterprises, LLC, located in Seymour, Indiana,
to store product inventory at this satellite location. The Company made seven payments on this lease, totaling approximately $15,451,
during the six months ended April 30, 2022. On November 11, 2021, the Company entered into a month-to-month lease agreement with FFE
Solutions Group, located in Salt Lake City Utah, to store additional product inventory at this satellite location. The Company made five
payments in the amount of approximately $19,108 for the rent on this lease during the six months ended April 30, 2022. The Company terminated
the lease with FFE Solutions Group on April 29, 2022 after returning all inventory previously stored at this location.
For
additional information regarding leases as of the date these unaudited consolidated financial statements were issued, please see Note
8, Subsequent Events.
Note
5 – Stockholder Equity
Additional
Paid-In Capital
During
the six months ended April 30, 2022, approximately $2,925,892 of stock option expense was recognized and contributed to Additional
Paid-In Capital. Also, during the six months ended April 30, 2022, on November 5, 2021 and February 5, 2022, restricted stock units (“RSUs”)
previously granted to employees vested and shares of Common Stock were issued, which contributed approximately $130,502 to Additional
Paid-In Capital. Additionally, during the six months ended April 30, 2022, warrants of the Company were exercised for shares of Common
Stock resulting in a further contribution to Additional Paid-in Capital of approximately $1,565,316. All of these contributions resulted
in a total increase in Additional Paid-In Capital during the six months ended April 30, 2022 of approximately $4,621,710.
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 Convertible Preferred Stock (the “Series A Preferred Stock”). Each share of the Series A Preferred
Stock was initially convertible into 100 shares of Common Stock; however, as a result of the Reverse Stock Split, the conversion rate
was adjusted such that each share of the Series A Preferred Stock is 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 April 30, 2022.
Common
Shares Issued
The
Company implemented the Reverse Stock Split, effective prior to the opening of the market on 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 a ratio of 1-for-12,
every 12 shares of the Common Stock were 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.
During
the three months ended April 30, 2022, stockholders of the Company exercised warrants to purchase approximately 873,286 shares of the
Company’s Common Stock.
The
authorized Common Stock of the Company consists of 1,000,000,000 shares with a par value of $0.001 per share. There were 31,166,090 shares
of Common Stock issued and outstanding as of April 30, 2022. There were 30,195,312 shares of the Common Stock issued and outstanding
as of October 31, 2021.
Warrants
Shares Issued
As part of the Company’s underwritten public
offering during fiscal 2021, the Company issued warrants to purchase a total of 4,053,750 shares of Common Stock at an exercise price
of $1.90 per share. These warrants expire in 2026. Warrants for 873,326 shares of Common Stock were exercised during the six-month period
ended April 30, 2022 for net proceeds of $1,566,190. The aggregate intrinsic value of the outstanding Common Stock warrants as of April
30, 2022 and October 31, 2021 was $0. The weighted average remaining term of the outstanding Common Stock warrants is 4.50 years as of
April 30, 2022.
The
following is a summary of the stock warrant activity during the fiscal six months ended April 30, 2022 and the year ended October 31,
2021.
| Share-based Payment Arrangement, Option, Activity | |
| | | |
| | | |
| | | |
| | |
| | |
Six Months Ended April 30, 2022 | |
Year Ended October 31, 2021 |
| | |
Number of Warrants | |
Weighted Average Exercise Price | |
Number of Warrants | |
Weighted Average Exercise Price |
| Warrants Outstanding at Beginning of the Period | |
| 3,173,922 | | |
$ | 1.90 | | |
| — | | |
$ | 1.90 | |
| | |
| | | |
| | | |
| | | |
| | |
| Granted | |
| — | | |
| — | | |
| 4,053,750 | | |
| 1.90 | |
| Exercised | |
| (873,286 | ) | |
| 1.90 | | |
| (879,828 | ) | |
| 1.90 | |
| | |
| | | |
| | | |
| | | |
| | |
| Canceled, forfeited, expired | |
| — | | |
| — | | |
| — | | |
| 1.90 | |
| | |
| | | |
| | | |
| | | |
| | |
| Warrants Outstanding and Exercisable at End of Period | |
| 2,300,636 | | |
$ | 1.90 | | |
| 3,173,922 | | |
$ | 1.90 | |
Restricted
Stock Unit Awards
On
November 5, 2021, the Company issued 61,250 shares of Common Stock to 7 employees in accordance with the vesting schedules set forth
in RSU agreements previously entered into with such employees, resulting in the recognition of approximately $110,250 of share-based
compensation. Of the shares issued to employees, 19,866 shares were withheld by the Company to satisfy tax withholding obligations and/or
satisfy cash settlement options to employees, equaling approximately $35,759.
On
February 5, 2022, the
Company issued 61,250 shares of Common Stock to 7 employees in accordance with the vesting schedules set forth in RSU agreements previously
entered into with such employees, resulting in the recognition of approximately $65,538 of share-based compensation. Of the shares issued
to employees, 24,058 shares were withheld by the Company to satisfy tax withholding obligations and/or satisfy cash settlement options
to employees, equaling approximately $24,058. On March 4, 2022, the Company’s Board approved the termination of the RSU agreements
with the consent of the employees. At the time these agreements were terminated, there remained 1,230,833 unvested RSUs with approximately
$4,457,875 of related unvested compensation. See
Common Stock Compensation Transition
Plan below for additional details.
Additionally,
during the three months ended April 30, 2022, the Company issued 18,160 shares of restricted Common Stock to two vendors who provide
legal and advertising and promotions services to the Company. Those vendors preferred to be paid in shares of restricted Common
Stock instead of cash for the services they performed and billed the Company.
.
Stock
Options
During
fiscal year 2021, the Company granted options exercisable for up to 150,000 shares of Common Stock of which 15,000 fully vested on March
17, 2021, 7,500 fully vested on June 30, 2021, 41,667 fully vested on December 1, 2021, 68,333 vested on March 17, 2022, 68,333 vest
on March 17, 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 9.43 years as of October 31, 2021 and of 8.92 years as of
April 30, 2022. The options 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. As of April 30, 2022, the amortized expense and unamortized expense of these stock options was $1,044,517
and $1,065,217, respectively.
The
Company granted new options during the three months ended April 30, 2022. On February 27, 2022, non-qualified stock options exercisable
for up to 100,000 shares of Common Stock were awarded to two consultants of the Company. These stock options
have a ten-year term from the grant date, with one-half of the shares vesting on the grant date and the remaining one-half of the shares
vesting on the first anniversary of the grant date. The stock options exercisable for an aggregate of up to 200,000 shares of Common
Stock had a fair market value of $2.45 per share, which represents the closing price of the Company’s Common Stock on the grant
date. The amortization expense and unamortized expense for these stock options for the three months ended April 30, 2022 was $285,832 and
$204,167.
The
aggregate intrinsic value of these outstanding options as of October 31, 2021 and April 30, 2022 was $0.
Common
Stock Compensation Transition Plan
During the second quarter of fiscal year 2021 the
Board and executive management began cost reduction discussions, including the reduction of non-cash items such as equity compensation
awards. Those discussions stalled primarily due to the focus on other corporate events of significant value.
In the first and second fiscal quarters of 2022, the
Board resumed serious discussions, assessments, and evaluations regarding the equity compensation awarded to its officers and employees.
The Board ultimately approved a stock option program for equity awards granted to its officers and employees. The Compensation Committee
spent considerable time, effort, and resources designing this program, which was finalized in February 2022 and approved in March 2022.
While evaluating and designing this program, the Compensation Committee did not utilize any aspects of value to the employees or other
features. Therefore, the termination of the RSU program and the newly adopted stock option program were developed completely independent
of each other and terminated and implemented, respectively, distinctly and simultaneously. Management
concluded under ASC 718 these transactions are a cancelation and replacement whereby total compensation cost measured at the date of a
cancellation and replacement is the portion of the grant-date fair value of the original award for which the service is expected to be
rendered at that date plus the incremental cost resulting from the cancellation and replacement. Incremental cost is measured as the excess
of the fair value of the replacement award over the fair value of the cancelled award at the cancellation date in which there was none
since the fair value of the replacement award was less than the fair value of the canceled award.
The outcomes of this decision and the transition
on March 4, 2022 resulting in: (i) the termination of the RSU program for all executive officers and employees, consisting of 1,230,833
unvested RSUs and (ii) the implementation a new stock option program for executive officers and employees. The stock options
granted pursuant to the program will have ten-year terms from the grant date, with one-half of the shares vesting on the grant
date and the remaining one-half of the shares vesting on the first anniversary of the grant date. Stock options exercisable for
up to an aggregate of 1,385,600 shares of Common Stock were granted to the executive officers and employees with a fair market
value of $2.85 per share, which was calculated using the Black Scholes method.
The amortization expense and unamortized expense for
these stock options for the three months ended April 30, 2022 was $2,303,533 and $1,645,395. The aggregate intrinsic value
of these outstanding options as of October 31, 2021 and April 30, 2022 was $0.
The fair values of the options on the grant
dates, as noted above, were approximately $3,948,948 using a Black-Scholes option pricing model with the following assumptions:
stock price $2.85 per share (based on the quoted trading price on the date of grant), volatility range of 294.55%, expected term
of 10 years, and a risk-free interest rate range of 1.62%. The Company is amortizing the expense over the vesting terms of each
option. The total stock option expense for the three and six months ended April 30, 2022 was approximately $2,303,533. The fiscal
year 2022 unamortized stock option expense at April 30, 2022 was approximately $1,645,395.
Note
6 – Related-Party Transactions
Revenue
and Accounts Receivable
During
the six months ended April 30, 2022, the Company recognized revenue of approximately $31,150 from four companies owned by Nirajkumar Patel, the Chief Executive Officer of
the Company, and/or his wife. There was no accounts receivable balance for these transactions as of April 30, 2022.
During
the six months ended April 30, 2021, the Company recognized revenue of approximately $61,545 from three companies owned by Nirajkumar
Patel, the Chief Executive Officer of the Company, and/or his wife. The accounts receivable balance for these transactions was $765 as of April 30, 2021.
Concentration
Purchases and Accounts Payable
During
the six months ended April 30, 2022, the Company did not purchase Products from Bidi, a related party. Sales of Products during the
first six months of fiscal year 2022 were drawn from the inventory purchase made on September 6, 2021. As of April 30, 2022, the
Company had accounts payable to Bidi of approximately $3,394,759
and Products valued at approximately $9,214,320
were held in inventory.
During
the six months ended April 30, 2021, the Company purchased Products of approximately $75,065,602 from Bidi, a related party.
As of April 30, 2021, the Company had accounts payable to Bidi of approximately $38,001,633. During the six months ended April 30, 2021,
100% of all Product purchases were made by the Company from Bidi.
Leased
Office Space and Storage 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. The Company’s
Chief Executive Officer is an officer of Just Pick. The liability for rent not paid from the beginning of the lease through April 30,
2022 is $21,900.
For
additional information regarding leases as of the date these unaudited consolidated financial statements were issued, please see Note
8, Subsequent Events.
Note
7 – Commitments and Contingencies
The
Company follows ASC 450-20, Loss Contingencies, to report accounting for contingencies. Liabilities for
loss contingencies arising from claims, assessments, litigation, fines and penalties and other sources are recorded when it is probable
that a liability has been incurred and the amount of the assessment can be reasonably estimated. There were no commitments or contingencies
as of April 30, 2022 and April 30, 2021 other than the below:
Cash
and Equity Bonus Awards
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 April 30, 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 approximately $70,785, and the cash bonuses totaling $100,000 should be accrued at April 30, 2021.
During
the quarter ended April 30, 2022, the $125 million accumulated revenue targets were achieved and the Company determined that cash bonuses
totaling $50,000 should be accrued at April 30, 2022.
On
March 4, 2022, the Board terminated all future cash and equity bonus awards for the Company’s Chief Executive Officer and its
Chief Operating Officer.
Service
Agreement
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) with QuikfillRx.
Effective as of March 16, 2021, the Company entered into the Second Amendment to Service Agreement (the “Second
Amendment”) with QuikfillRx. Effective as of September 17, 2021, the Company entered into the Third Amendment to the Service
Agreement (the “Third Agreement” and, collectively with the First Amendment, Second Amendment, and the Service
Agreement, the “Amended Service Agreement”) with QuikfillRx. Pursuant to the terms of the 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 paid QuikfillRx $125,000 per month for the Services to be performed during such
calendar month; (iv) 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 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. On
November 1, 2021, the parties agreed to extend the term for an additional one-year period. 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. |
On
March 17, 2021, the Company entered into a consulting agreement with Russell
Quick, pursuant to which the Company granted stock options exercisable for up to 41,667 shares of the Company’s Common Stock in
exchange for consulting services. The shares underlying the stock option fully vested on December 1, 2021. The exercise price per share is $28.68. The Company recognized approximately $190,000 in expense to account for the stock options.
Russell Quick is the Chief Executive Officer of QuikfillRx. The Company accrued approximately $35,803 for a quarterly bonus payable to
QuikfillRx, based on the Applicable Gross Quarterly Sales results of the three months ended April 30, 2022.
Note
8 – Subsequent Events
Third
Amended and Restated Distribution Agreement
On
June 10, 2022, the Company entered into the Third A&R Distribution Agreement with Bidi, which amended and restated the A&R Distribution
Agreement (collectively, the “Distribution Agreement”).
The
Third A&R Distribution Agreement modifies various terms and provisions to reflect the terms of the PMI Licensing Agreement (as defined
below) and also modify the terms between the Company and Bidi. Pursuant to the Third A&R Distribution Agreement, Bidi granted the
Company, and its designees, an exclusive right to distribute electronic and non-electronic nicotine delivery systems and related components
(other than certain excluded products) for sale and resale to both retail level customers and non-retail level customers worldwide, subject
to a carve-out for, and exclusion, of the PMI Markets (as defined below). The Third A&R Distribution Agreement has a term of ten
years and automatically renews for a successive ten-year term, unless earlier terminated pursuant its terms.
Exercise of Stock Warrants
As part of the Company’s underwritten public
offering during fiscal 2021, the Company issued warrants to purchase a total of 4,053,750 shares of Common Stock at an exercise price
of $1.90 per share. These warrants expire in 2026. Warrants for 3,000 shares of Common Stock were exercised on June 14, 2022 for net proceeds
of $5,700. The aggregate intrinsic value of the outstanding Common Stock warrants as of April 30, 2022 and October 31, 2021 was $0. The
weighted average remaining term of the outstanding Common Stock warrants is 4.50 years as of April 30, 2022.
Lease
Agreement
On
June 10, 2022, the Company entered into a Lease Agreement (the “2022 Lease”) with Just Pick for approximately 21,332 rentable
square feet combined in the office building and warehouse located at 4460 Old Dixie Highway, Grant Valkaria, Florida 32949 (the “Premises”),
together with all improvements thereon. Just Pick is considered a related party to the Company because the Company’s Chief Executive
Officer and director, Mr. Nirajkumar Patel, owns and controls the Just Pick.
The
anticipated commencement date of the 2022 Lease is June 10, 2022 (the “Commencement Date”). The term of the Lease is one
(1) year (the “Lease Term”), with one automatic renewal period for a five-year term. The Company, in its sole and absolute
discretion, has the option to extend the automatic renewal for an additional five (5) year period immediately following the first renewal
term.
The
Company must pay Just Pick base rent equal to $17,776.67 per month during the first year of the Lease Term. Thereafter, the monthly base
rent will be increased annually with a monthly base rent of $18,665.50 in the second year, $19,554.33 in the third year, $20,443.17 in
the fourth year, $22,220.83 in the fifth year, $23,998.50 in the sixth year, and one twelfth (1/12th) of the market annual rent for the
seventh through eleventh years, if appliable. In addition to the base rent, the Company must pay one hundred percent (100%) of operating
expenses, insurance costs, and taxes for each calendar year during the Lease term.
Any
changes, alterations, additions, or improvements to the Premises made by the Company becomes the property of Just Pick unless prior to
the 2022 Lease expiration, the Company removes such improvements and restores the Premises to the same condition as existed on the Commencement
Date.
The
2022 Lease contains customary representations, warranties, covenants, indemnification provisions, default provisions, and termination
provisions.
License
Agreement
On
June 10, 2022, Bidi entered into a License Agreement (the “License Agreement”) with KBI, pursuant to which KBI has the exclusive
irrevocable license to use Bidi’s licensed intellectual property to the extent necessary for KBI to fulfill its obligations set
forth in the Deed of Licensing Agreement (the “PMI License Agreement”), by and between KBI and PMPSA. Such irrevocable license
includes: (i) the right of KBI to grant sub-licenses to PMPSA under the PMI License Agreement for the express purposes set forth in the
PMI License Agreement, but for no other purpose; (ii) the right of KBI to grant to PMPSA the right to grant sub-sub-licenses in the manner
set forth in the PMI License Agreement, but for no other purpose; and (iii) certain branding rights to the extent (but only to the extent)
necessary to permit KBI to perform its obligations to PMPSA as set forth in the PMI License Agreement.
Pursuant
to the License Agreement, if at any time, KBI receives any license of PMPSA intellectual property from PMPSA or any of its affiliates
in the manner contemplated by the PMI License Agreement, KBI will grant Bidi an irrevocable sub-license of all right, title, and interest
of KBI in and to that PMPSA intellectual property. In addition, Bidi and KBI agree that any amount payable and all net royalties payable
to KBI under the PMI License Agreement will be apportioned equally among Bidi and KBI in a manner such that each will ultimately receive
fifty percent (50%) thereof.
The
License Agreement contains customary representations, warranties, covenants, and indemnification provisions.
Deed
of Licensing Agreement
On
June 13, 2022 KBI entered into the PMI License Agreement with PMPSA, effective as of May 13, 2022 (the “PMI Commencement Date”).
Pursuant to the PMI License Agreement, KBI granted PMPSA an exclusive irrevocable license to use its technology, documentation, and intellectual
property to make, distribute, and sell disposable nicotine e-cigarettes Products based on the intellectual property in certain international
markets set forth in the PMI License Agreement (the “PMI Markets”). The Company has the exclusive international distribution
rights to the Products and, in order to allow KBI to fulfill its obligations set forth in the PMI License Agreement, has contributed
the international distribution rights for the PMI Markets to KBI as set forth in a Capital Contribution Agreement dated June 10, 2022.
The sublicense granted to PMPSA is exclusive in the PMI Markets and neither KBI nor any of its affiliates can sell, promote, use, or
distribute any competing products in the PMI Markets for the duration of the term of the PMI License Agreement and any Sell-Out Period
(as defined in the PMI License Agreement). PMSPA will be responsible for any regulatory filings necessary to sell the Products in the
PMI Markets. Both KBI and PMPSA agree to work together in the registration and maintenance of the Intellectual Property, but KBI will
bear all cost and expense to implement the registration strategy. Finally, PMPSA has agreed to potential future development services
with KBI in the PMI Markets and has been granted certain rights with respect to potential future products.
The
initial term of the PMI License Agreement is five (5) years and automatically renews for an additional five-year period unless PMPSA
has failed to meet the agreed upon minimum key performance indicators set forth in the PMI License Agreement, in which case the PMI License
Agreement will automatically terminate at the end of the initial license term.
In
consideration for the grant of the licensed rights, PMPSA agreed to pay to KBI a royalty equal to 2.00% to 3.50% of the base price of
the first sale of each unit of Product manufactured. In addition, before the launch of the first product in a market and each anniversary
of such launch, PMPSA agrees to pre-pay to KBI a guaranteed minimum royalty equal to twenty percent (20%) of the estimated royalties
payable by PMPSA to KBI in relation to all markets in the twelve (12)-month period following the first launch or each successive anniversary
of the first launch, subject to an aggregate maximum guaranteed royalty payment of One Million Dollars ($1,000,000) for all markets for
each applicable twelve (12)-month period. PMPSA may require modification of certain products to be sold under the PMI Licensing Agreement
to be modified for a PMI Market. Pursuant to the PMI Licensing Agreement, PMPSA has absolute discretion over sales, marketing, product
branding and packaging pertaining to sales in the PMI Markets, as well as the right to select the specific PMI Markets in which to launch
commercialization and determine what product types are to be promoted in each market, subject to sales and marketing plans and annual
business plans set by PMPSA and certain expansion criteria agreed between PMPSA and KBI.
The
PMI License Agreement contains customary representations, warranties, covenants, and indemnification provisions; however, KBI’s
liability under the PMI License Agreement is capped at the greater of: (i) Ten Million Dollars ($10,000,000); or (ii) an amount equal
to the total of the royalties due to KBI (but not yet paid) plus the royalties (including the guaranteed royalty payment) paid to KBI
pursuant to the PMI License Agreement during the immediately preceding twelve (12) consecutive months, provided that such amount shall
not exceed Thirty Million Dollars ($30,000,000).
In
connection with the PMI License Agreement, the Company, Bidi, and PMPSA also entered into a deed of letter (“Deed of Letter”)
to require specific performance of the duties and obligations set forth in the PMI License Agreement if KBI is unable or fails to sublicense
the intellectual property to PMPSA pursuant to the PMI License Agreement and/or is unable or fails to perform certain of its obligations
or grant the rights pursuant to the PMI License Agreement. In addition, the Company, Bidi, and PMPSA entered into a guarantee (“Guarantee”),
whereby each of the Company and Bidi guarantees to PMPSA up to 50% of all of KBI’s monetary obligations set forth in the PMI License
Agreement if KBI fails to perform or discharge certain of its obligations in the PMI License Agreement.