Kaival Brands Innovations Group, Inc. 10-K

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. Market Information Our common stock is quoted on the OTC Markets Group Inc.’s (the “OTCM”) OTCQB® Venture Market (the “OTCQB”) under the symbol “KAVL.” There is currently a limited trading market in the shares of our common stock. Set forth below are the range of high and low bid closing bid prices for the periods indicated as reported by the OTCM. The market quotations reflect inter-dealer prices, without retail mark-up, mark-down, or commissions and may not necessarily represent actual transactions. Quarter Ended High Bid Low Bid April 30, 2021 (1) $3.65 $1.17 January 31, 2021 $1.40 $0.2283 October 31, 2020 $0.97 $0.30 July 31, 2020 $1.09 $0.045 April 30, 2020 $0.0749 $0.0081 January 31, 2020 $0.020 $0.006 October 31, 2019 $0.024 $0.006 July 31, 2019 $0.049 $0.0066 April 30, 2019 $0.025 $0.0067 January 31, 2019 $0.038 $0.0101 (1) Though February 11, 2021. Holders As of October 31, 2020, we had 277,282,630 shares of common stock issued and outstanding and 3,000,000 shares of Series A Preferred Stock issued and outstanding. As of October 31, 2020, we had approximately 176 stockholders of record. As of February 11, 2021, we have 166 stockholders of record, 279,171,677 shares of our common stock issued and outstanding, and 3,000,000 shares of Series A Preferred Stock issued and outstanding. 14 Dividends and Share Repurchases We have not paid any dividends to our stockholders and do not intend to pay cash dividends on our common stock for the foreseeable future. Any future determination related to dividend policy will be made at the discretion of our Board. Also, there are no restrictions, which would limit our ability to pay dividends on common stock Recent Sales of Unregistered Securities; Uses of Proceeds from Registered Securities Common Stock Issued During the year ended October 31, 2020, 3,674,056 shares of our common stock were issued to QuikfillRx, LLC, a Florida limited liability company (“QuikfillRx”) as compensation for marketing and promotion services rendered to us. During the year ended October 31, 2020, 150,000 shares of our common stock were issued to Uptick Capital Partners as compensation for consulting services rendered to us. During the year ended October 31, 2020, 1,094,000 shares of our common stock were issued to seven of our employees as employee bonus compensation. We withheld 226,000 shares to satisfy tax obligations due upon such issuances. Purchases of Equity Securities by the Issuer and Affiliated Purchasers During the year ended October 31, 2020, we repurchased 226,000 shares of our common stock, which were immediately cancelled upon repurchasing. Our Chief Executive Officer and Chief Financial Officer, Nirajkumar Patel, and our Chief Operating Officer, Eric Mosser did not purchase shares in the open market during our fiscal year ended October 31, 2020. 15 Item 6. Selected Financial Data. As a “smaller reporting company”, we are not required to provide the information required by this Item. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Management’s Discussion and Analysis of Financial Condition and Results of Operations is designed to provide a reader of the financial statements with a narrative report on our financial condition, results of operations, and liquidity. This discussion and analysis should be read in conjunction with the audited Financial Statements and notes thereto for the year ended October 31, 2020 included under Item 8 – Financial Statements and Supplementary Data in this Report. The following discussion contains forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations, and intentions. Our actual results could differ materially from those discussed in the forward-looking statements. Please also see the cautionary language at the beginning of this Report regarding forward-looking statements. Potential Impact of COVID-19 In March 2020, the World Health Organization (the “WHO”) declared the outbreak of COVID-19 as a pandemic based on the rapid increase in global exposure. COVID-19 continues to spread throughout the world, including the United States. Our business operations, which commenced during this pandemic, continue to be operational and, to date, we have not seen any significant direct negative impact of COVID-19 to our newly commenced business. However, the COVID-19 pandemic continues to impact economic conditions, which could impact the short-term and long-term demand from our customers and, therefore, has the potential to negatively impact our results of operations, cash flows, and financial position in the future. Management is actively monitoring this situation and any impact on our financial condition, liquidity, and results of operations. However, given the daily evolution of the COVID-19 pandemic and the global responses to curb its spread, we are not presently able to estimate the effects of the COVID-19 pandemic on our future results of operations, financial condition, or liquidity for the remainder of fiscal year 2021 and, possibly, beyond. Business Overview Currently, we market and place the Products into national distribution channels through long-standing industry relationships in accordance with the A&R Distribution Agreement entered into with Bidi, a related party, in March 2020 (and subsequently amended and restated in May 2020. Pursuant to the A&R Distribution Agreement, we sell and resell the Products to both retail level customers and non-retail level customers. Bidi’s primary product is the “Bidi Stick.” Bidi is considered a related party to us because our Chief Executive Officer, Chief Financial Officer, and director, Mr. Nirajkumar Patel, owns and controls Bidi. Mr. Patel is also a beneficial owner of KH, the entity that is our largest controlling stockholder. Thus, Bidi and we are under common control. Pursuant to the terms of the A&R Distribution Agreement, Bidi provides us with all branding, logos, and marketing materials to be utilized by us in connection with our marketing and promotion of the Products. We engaged QuikfillRx in March 2020 and, pursuant to the Amended Service Agreement, QuikfillRx agreed to provide us with the Services, as we may request from time to time. 16 We process all sales made to retail customers and non-retail customers, with all sales to retail customers to be made through the website, www.bidivapor.com. We provide all customer service and support at our own expense. Bidi sets the minimum prices for all sales made by us. With respect to sales to non-retail customers, we submit purchase orders to Bidi, Bidi delivers the Products to us, and we ship the Products directly to these non-retail customers. In the case of retail customers, we maintain adequate inventory levels of the Products in order to meet these customers’ demand, and deliver the Products sold to these retail customers. In connection with the A&R Distribution Agreement, we entered into the Sub-Distribution Agreements with certain counterparties, pursuant to which we appointed such counterparties as non-exclusive sub-distributors of the Products to non-retail customers within the Territory. Each of the Sub-Distribution Agreements set forth certain minimum purchase obligations. Going Concern Prior to March 2020, we demonstrated adverse conditions that raised substantial doubt about our ability to continue as a going concern. These adverse conditions were negative financial trends, specifically operating loss, working capital deficiency, and other adverse key financial ratios. Also, we had not established any source of revenue to cover our operating costs. Our management funded operating expenses with related party contributions to capital. However, on March 9, 2020, we commenced business operations upon entering into the A&R Distribution Agreement with Bidi, a related party company, whereby Bidi granted us an exclusive worldwide right to distribute the Products for sale and resale to both retail level customers and non-retail level customers. In April, in connection with the A&R Distribution Agreement, we began to enter into the Sub-Distribution Agreements with certain third-party counterparties, whereby we appointed such counterparties as non-exclusive sub-distributors. Pursuant to the 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 Territory. With these agreements in effect, we have established sources of revenue to cover our operating costs and achieved net income of $3,845,822 during the year ended October 31, 2020. As of October 31, 2020, we had a positive working capital of $4,406,679. Management plans to continue similar operations with increased marketing, which we believe will result in increased revenue and net income. However, there is no assurance that management’s plan will be successful due to the current economic climate in the United States and globally. At the time of filing this Report, the previously reported going concern has been alleviated based on the reasons above, and management does not have substantial doubt our ability to continue as a going concern. 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. The audited consolidated financial statements filed as part of this Report 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. 17 Liquidity and Capital Resources We have no known demands or commitments and are not aware of any events or uncertainties as of October 31, 2020 that will result in or that are reasonably likely to materially increase or decrease our current liquidity. On October 31, 2020, we had working capital of approximately $4.4 million and total cash of approximately $7.4 million. Now that we have commenced business operations, we intend to generally rely on cash from operations and equity and debt offerings, to the extent necessary and available, to satisfy our liquidity needs. There are a number of factors that could result in the need to raise additional funds, including a decline in revenue or a lack of anticipated sales growth and increased costs. Our efforts are directed toward generating positive cash flow and profitability. If these efforts are not successful, we may need to raise additional capital. Should capital not be available to us at reasonable terms, other actions may become necessary in addition to cost control measures and continued efforts to increase sales. These actions may include exploring strategic options for the sale of the Company, the creation of joint ventures or strategic alliances under which we will pursue business opportunities, or other alternatives. We believe we have the financial resources to weather any short-term impacts of COVID-19; however, we are unable to presently estimate any potential future impacts from COVID-19 and an extended impact could have a material and adverse effect on our sales, earnings, and liquidity. Cash Flows: Cash flow provided by operations was approximately $7.6 million for the fiscal year 2020, compared to $0 for the fiscal year 2019. The increase in cash flow from operations for the fiscal year 2020 was mainly due to the increase in net income. We anticipate continued improvement in our cash flows provided by operations in future years based on the minimum purchase obligations set forth in the Sub-Distribution Agreements, partially offset by increases in costs as we ramp up our sales and marketing efforts. Results of Operations Year ended October 31, 2020, compared to year ended October 31, 2019 Revenues: Revenues for the fiscal year 2020 were approximately $64.3 million, compared to $0 in the prior fiscal year. During the second quarter of fiscal year 2020, we entered into the A&R Distribution Agreement, pursuant to which we were granted the exclusive, worldwide right to distribute the Products. In connection therewith, we entered into the Sub-Distribution Agreements and other agreements with counterparties and granted such sub-distributors the right to distribute the Products to non-retail customers within the Territory. 18 Cost of Revenue and Gross Profit: Gross profit in the fiscal year 2020 was approximately $10.0 million, compared to $0 for the fiscal year 2019. Total cost of revenue was approximately $54.3 million for the fiscal year 2020, compared to $0 for the fiscal year 2019. The increase in gross profit is entirely driven by the sales of the Products beginning in the second quarter of fiscal year 2020. Operating Expenses: Total operating expenses were approximately $4.7 million for the fiscal year 2020, compared to approximately $69,000 for the fiscal year 2019. For the fiscal year 2020, operating expenses consisted of commissions paid to QuikfillRx pursuant to the Amended Service Agreement of approximately $2.3 million and general and administrative expenses of approximately $2.4 million. General and administrative expenses in the fiscal year 2020 consisted primarily of legal fees, salaries, professional fees, merchant fees, and other service fees. Total operating expenses for the fiscal year 2019 consisted solely of general and administrative expenses, which were primarily from professional fees incurred. We expect future operating expenses to continue to increase while we generate increased sales growth. Income Taxes: During the fiscal year 2020, we accrued approximately $1.3 million for income taxes, compared to $0 for the fiscal year 2019. Please refer to Note 7, Income Tax, in the Notes to the Consolidated Financial Statements in this Report for additional information related to our income taxes. Net Income (Loss): Net income for the fiscal year 2020 was approximately $3.8 million, or $0.01 basic and diluted net income per share, compared to net loss of approximately $68,849, or $0.00 basic and diluted net loss per share, for the fiscal year 2019. The increase in net income for the fiscal year 2020, as compared to fiscal year 2019, is attributable to the commencement of sales of the Products. Weighted-average common stock shares outstanding were 516,212,943 at October 31, 2020 as compared to 572,364,574 at October 31, 2019. Accrued Expenses: We accrued approximately $80,000 for a quarterly bonus and $132,000 for a quarterly commission payable to QuikfillRx, based our applicable gross quarterly sales for the three months ended October 31, 2020. We accrued approximately $165,000 for bonuses payable to our executive officers based on the revenues benchmark achieved during the three months ended July 31, 2020. Excise taxes totaling approximately $502,000 were accrued based on taxable sales during the fourth quarter of fiscal 2020. Concentrations: Financial instruments, which potentially subject us 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 year ended October 31, 2020, 100% of the inventories of Products, primarily consisting of the “Bidi Stick,” were purchased from Bidi, a related party company that is owned by Nirajkumar Patel, our Chief Executive Officer and Chief Financial Officer, in the amount of approximately $54.0 million. It also accounted for 100% of the total accounts payable as of October 31, 2020. 19 Concentration of Revenues and Accounts Receivable: For the year ended October 31, 2020, approximately 41% of the revenue from the sale of products, primarily consisting of the “Bidi Stick,” was generated from Favs Business, LLC in the amount of approximately $26.4 million and approximately 6% of the revenue from the sale of products was generated from MMS Distro, Inc., in the amount of approximately $3.9 million. Go Brands, Inc., with an outstanding balance of approximately $319,000 and GPM Investment, LLC, with an outstanding balance of approximately $551,200, accounted for approximately 33% and 56% of the total accounts receivable from customers, respectively, as of October 31, 2020. Contractual Obligations We qualify as a smaller reporting company, as defined by Item 10 of Regulation S-K and, thus, are not required to provide the information required by this Item. Off Balance Sheet Arrangements We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources that is material to investors. Cash and Cash Equivalents We consider all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. Cash and cash equivalents at October 31, 2020 and October 31, 2019 were $7,421,701 and $0, respectively. Critical Accounting Policies and Estimates Please see Note 2, Basis of Presentation and Significant Accounting Policies , to the Consolidated Financial Statements for a description of critical accounting policies and estimates. Recently Adopted Accounting Pronouncements See Note 2, Basis of Presentation and Significant Accounting Policies, to the Consolidated Financial Statements for a description of recent accounting pronouncements and accounting changes. Item 7A. Quantitative and Qualitative Disclosures about Market Risk. We qualify as a smaller reporting company, as defined by Item 10 of Regulation S-K and, thus, are not required to provide the information required by this Item. 20