Item 1. Business
Item 1. Business.
As used in this Report, the
terms “we,” “us,” “our,” the “Company,” and “Kaival” refer to Kaival Brands
Innovations Group, Inc., a Delaware corporation, unless otherwise indicated. The term “Common Stock” means our common stock,
par value $0.001 per share.
Unless the context specifically
requires otherwise, all historical share and per-share amounts reflected in our consolidated financial statements and other financial
information contained in this Report are presented to reflect a 1-for-21 reverse stock split of our Common Stock which became effective
for legal and accounting purposes on January 22, 2024 as if such split occurred as of the earliest period presented.
Overview
We are engaged in the sale, marketing
and distribution of electronic nicotine delivery system (“ENDS”) products, also known as “e-cigarettes”, in a
variety of favors. Our primary product is the Bidi ® Stick as well as other products manufactured by our affiliate Bidi
Vapor LLC (“Bidi”). We hold the exclusive worldwide right to market and distribute the Bidi ® Stick and certain
other products manufactured by Bidi. Our current revenue generating activities are focused on driving sales growth of the BIDI ®
Stick, primarily through wholesale and traditional retail channels, including convenience stores. Along with our affiliate Bidi, which
bears the bulk of the responsibility for U.S. Food and Drug Administration (“FDA”) and other regulatory matters relating to
its products, we are committed to steadfast compliance with established FDA requirements regarding the use of our products.
At the same time, as the FDA regulatory
landscape and PMTA-related enforcement continues to evolve, we have faced challenges and industry-wide headwinds, which we are continuing
to navigate by pursuing new revenue opportunities by diversifying our platform through the distribution, development, and subsequent scaling
of other nicotine and non-nicotine products. An important goal for our company is to leverage our existing presence with our sales channels
to establish an efficient platform from which to create shareholder value by developing and growing
current and potentially new business lines, revenues and, ultimately, positive cash flows and profitability.
Business Strategy
In addition
to our focus on driving revenue through distribution of the BIDI® Stick, we intend to build our revenue by executing key internal
strategic initiatives. Accomplishing these financial goals will depend on a number of factors including our ability to execute these strategies.
Representative key initiatives include:
●
Maximizing
the core business:
●
Continuing
the growth and management of strategic alliances with market leaders within dense, established e-cigarette markets;
●
Development
of internal national account sales team to drive new revenue opportunities and manage key strategic third-party vendor and broker
alliances to maximize targeted market penetration;
●
Search
for high-caliber, experienced talent that create impact and add value to our organization quickly;
●
Effective
financial management and capital planning:
●
Establishing
an efficient, scalable organizational infrastructure to support our expected growth and diversification;
●
Improving
overall business processes to deliver greater value to our customers;
●
Data-driven
product innovation and strategic expansion:
●
Investing
in our core organizational capabilities to provide diversified, revenue generative opportunities both through our existing distribution
network and beyond;
●
Further
development of internal data processes to drive growth and diversification efforts;
●
Pursuing
third-party licensing opportunities through our vaporization and inhalation-related intellectual property portfolio which we acquired
from GoFire Inc. in May 2023;
●
During
2024 and beyond, we plan on exploring strategic acquisition and collaboration arrangements that generate revenue, positive cash flows
and profitable operations in order to expand the scale of our company by capitalizing on our traditional retail outlet other other
distribution relationships.
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We will continue to align ourselves with progressive,
proven, performance-based partners, which may include the development and expansion of key financial services relationships as we seek
to diversify through data-driven decisions.
Description of Business Segments & Key Agreements
Bidi Vapor, LLC Distribution Agreement
On March 9, 2020, we entered into
an exclusive distribution agreement (the “Distribution Agreement”) with our affiliate Bidi, which Distribution Agreement was
amended and restated on May 21, 2020, April 20, 2021, on June 10, 2022, and on November 17, 2022 (collectively, the “A&R Distribution
Agreement”). Pursuant to the A&R Distribution Agreement, Bidi granted us an exclusive worldwide right to distribute Bidi’s
ENDS (as more particularly set forth in the A&R Distribution Agreement) for sale and resale to both retail level customers and non-retail
level customers. Currently, the products consist solely of the “ BIDI® Stick, ” Bidi’s disposable, tamper
resistant ENDS product made with medical-grade components, a UL-certified battery and technology designed to deliver a consistent vaping
experience for adult smokers 21 and over. We presently distribute products to wholesalers and retailers of ENDS products, having ceased
all direct-to-consumer sales in February 2021. Nirajkumar Patel, our Chief Science and Regulatory Officer and director and an indirect
controlling shareholder of our company, owns Bidi.
BIDI® Stick comes in a variety
of flavor options for adult cigarette smokers. We do not manufacture any of the products we resell. The BIDI® Stick is manufactured
by Bidi. Pursuant to the terms of the A&R Distribution Agreement, Bidi provides us with all branding, logos, and marketing materials
to use with our commercial partners in connection with our marketing and promotion of Bidi products.
The A&R Distribution Agreement
extends the previous one-year, annual renewable term to an initial term of ten years, which automatically renews for another ten-year
term if we satisfy certain minimum purchase thresholds. The A&R Distribution Agreement also provides us with a right of first refusal
in the event Bidi receives an offer that would constitute a “change of control transaction,” as well as a right of first
refusal to act as the exclusive distributor of any and all future products of Bidi that arise out of or related to ENDS and components
related to ENDS, or arise out of or related to the tobacco-derived nicotine industry.
In connection with the A&R
Distribution Agreement, we 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 sub-distribution agreements, as amended and restated, are collectively
referred to as the “Sub-Distribution Agreements”), whereby we appointed the counterparties as non-exclusive sub-distributors.
Pursuant to the Sub-Distribution Agreements, the sub-distributors agreed to purchase for resale products in such quantities as they should
need to properly service non-retail customers within the continental United States (the “Territory”).
We process all sales made to non-retail
customers, with all sales to non-retail customers made through Bidi’s age-restricted website, www.wholesale.bidivapor.com. We ceased
all direct-to-consumer sales in February 2021 in order to better ensure youth access prevention and to comply with the Prevent All Cigarette
Trafficking Act (known as the PACT Act). We provide all customer service and support at our own expense. We set the minimum prices for
all sales made by us. We maintain adequate inventory levels of products in order to meet the demands of our non-retail customers and
deliver products sold to these customers.
A key third party collaborator
of ours is QuikfillRx, a Florida limited liability company which does business as “Kaival Marketing Services” to reflect
its contributions to our company. QuikfillRx provides us with certain services and support relating to sales management, website development
and design, graphics, content, social media, management and analytics, and market and other research. QuikfillRx provides these services
to us pursuant to a Services Agreement, most recently amended on November 9, 2022, which has a current term ending on October 31, 2025
(subject to potential one-year extensions) and pursuant to which QuikfillRx receives monthly cash compensation and was granted certain
equity compensation in the form of options.
Kaival Labs, Inc. & Kaival Brands International,
LLC.
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On August 31, 2020, we formed
Kaival Labs, Inc., a Delaware corporation (herein referred to as “Kaival Labs”), as a wholly owned subsidiary for the purpose
of developing our own branded and white-label products and services, of which none has commenced as of the date of this Report. We have
not yet launched any Kaival-branded products, nor has it begun to provide white label wholesale solutions for other product manufacturers.
We have, and may continue to,
utilize Kaival Labs to acquire or license complimentary businesses or assets. On May 30, 2023, through Kaival Labs, we acquired certain
vaporization and inhalation-related intellectual property from GoFire, Inc. (“GoFire”) in exchange for equity securities for
our company and contingent cash consideration. The goal of this acquisition is to diversify our product offerings and create near and
longer-term revenue opportunities in the form of potential licenses for the acquired technology and our development of new products based
on the purchased assets. In the near term, we expect to seek third-party licensing opportunities in the cannabis, hemp/CBD, nicotine and
nutraceutical markets. Longer term, we believe we can utilize the purchased assets to create innovative and market-disruptive products,
including patent protected vaporizer devices and related hardware and software applications. No assurances can be given, however, that
the GoFire assets will generate revenue for us in the future or otherwise create the value for our company that we anticipate.
On March 11, 2022, we formed Kaival
Brands International, LLC, a Delaware limited liability company (herein referred to as “KBI”), as a wholly owned subsidiary
for the purpose of entering into an international licensing agreement with Philip Morris Products S.A. (“PMPSA”), a wholly
owned affiliate of Philip Morris International Inc. (“PMI”), as described further below.
FDA PMTA and MDO Determinations, Related Court
Actions and the Impact on Our Business
Non-Tobacco Flavored BIDI ®
Sticks
In September 2021, in connection
with the Bidi’s Premarket Tobacco Product Application (“PMTA”) process for BIDI ® Stick, the U.S.
Food and Drug Administration (“FDA”) effectively “banned” non-tobacco flavored ENDS by denying nearly all then-pending
PMTAs for such products (including Bidi’s). Following the issuance by the FDA of a related Marketing Denial Order (“MDO”)
regarding these ENDS products, manufacturers were required to stop selling non-tobacco flavored ENDS 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 supervisory 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 non-tobacco
flavored ENDS product, and not strictly a menthol flavored product.
On September
29, 2021, Bidi petitioned the U.S. Court of Appeals for the Eleventh Circuit (or the 11 th Circuit) to review the FDA’s
denial of the PMTAs for its non-tobacco flavored BIDI® Stick ENDS (including the Arctic BIDI® Stick), arguing that it was arbitrary
and capricious under the Administrative Procedure Act (or the 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 (or the 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 non-tobacco flavored products compared to tobacco-flavored ENDS products, and that the FDA should have gone
through the notice and comment rulemaking process for this requirement.
On August
23, 2022, the 11 th Circuit set aside (i.e., vacated) the MDO issued to the non-tobacco flavored BIDI® Sticks and remanded
Bidi’s PMTA back to the FDA for further review. Specifically, the 11 th Circuit held that the MDO was “arbitrary
and capricious” in violation of the APA because the FDA failed to consider the relevant evidence before it, specifically Bidi’s
aggressive and comprehensive marketing and sales-access-restrictions plans designed to prevent youth appeal and access.
The 11 th Circuit’s
opinion further indicated that the FDA did not properly review the data and evidence that it has long made clear are critical to the
“appropriate for the protection of the public health” standard for PMTAs set forth in the Tobacco Control Act including,
in Bidi’s case, “product information, scientific safety testing, literature reviews, consumer insight surveys, and details
about our company’s youth access prevention measures, distribution channels, and adult-focused marketing practices,” which
“target only existing adult vapor product users, including current adult smokers,” as well as our retailer monitoring program
and state-of-the-art anti-counterfeit authentication system. Because a MDO must be based on a consideration of the relevant factors,
such as the marketing and sales-access-restrictions plans, the denial order was deemed arbitrary and capricious, and vacated by the FDA.
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The
FDA did not appeal to the 11th Circuit’s decision. The FDA had until October 7, 2022 (45 days from the August 23, 2022 decision)
to either request a panel rehearing or a rehearing “en banc” (a review by the entire 11 th Circuit, not just the
3-judge panel that issued the decision), and until November 21, 2022 (90 days after the decision) to seek review of the decision by the
U.S. Supreme Court. No request for a rehearing was filed, and no petition for a writ of certiorari was made to the Supreme Court.
In
light of the 11 th Circuit decision, we have had the continued ability to market and sell the non-tobacco flavored BIDI®
Sticks, subject to the FDA’s enforcement discretion, for the duration of the PMTA scientific review. The FDA has indicated that
it is prioritizing enforcement of unauthorized ENDS against companies (1) that never submitted PMTAs, (2) whose PMTAs have been refused
acceptance or filing by the FDA, (3) whose PMTAs remain subject to MDOs, and (4) that are continuing to market unauthorized synthetic
nicotine products after the July 13, 2022 cutoff. As none of these scenarios apply to Bidi, we believe the current risk of FDA enforcement
is low.
Since
the PMTA was remanded, Bidi has continued to update its application with the results of new studies, including a nationwide population
prevalence study on the BIDI® Stick that is currently undergoing peer review for publication.
Classic
BIDI ® Stick
Separately,
on or about May 13, 2022, the FDA placed the tobacco-flavored Classic BIDI® Stick into the final Phase III scientific review, and
in September 2022 completed a remote regulatory assessment of Bidi and its contract manufacturer in China, SMISS Technology Co. LTD,
in relation to the pending PMTA for the Classic BIDI® Stick.
On
March 20, 2023 Bidi received its anticipated deficiency letter for the Classic BIDI® Stick PMTA, outlining FDA’s remaining
scientific questions. On June 18, 2023, Bidi, provided a timely, comprehensive response to the FDA’s deficiency letter.
On
January 22, 2024, FDA issued a MDO for the Classic BIDI® Stick. While this development precludes us from marketing the Classic BIDI®
Stick, which could have a material adverse affect on our company, the FDA’s decision does not involve the ten PMTAs for Bidi Vapor ’ s
non-tobacco flavored devices described above which are still under the FDA ’ s scientific
review. Those ten products remain available for sale, subject to FDA ’ s enforcement discretion.
In response to the Classic BIDI®
Stick MDO, on January 26, 2024, Bidi filed a petition requesting that the 11 th Circuit review the MDO, which Bidi believes
was, among other things, arbitrary and capricious, in violation of the Administrative Procedure Act. Bidi is also seeking a stay of the
MDO pending the outcome of the litigation. No assurances can be given on the outcome.
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Other
Potential Product Offerings & Opportunities
In
May 2023 we acquired 19 existing and 47 pending patents with novel technologies related to vaporization and inhalation technologies from
GoFire. The GoFire patent portfolio includes novel technologies across extrusion dose control, product preservation, tracking and tracing
usage, multiple modalities (i.e., different methods of vaporizing) and child safety. The patents and patent applications cover territories
including the United States, Australia, Canada, China, the EPO (European Patent Organization), Israel, Japan, Mexico, New Zealand and
South Korea. The portfolio also includes a proprietary mobile device software application that is used in conjunction with certain patents
in the portfolio.
In
the near term, we expect to seek third-party licensing opportunities in the cannabis, hemp/CBD, nicotine, nutraceutical and pharmaceutical
markets, as a means of monetizing our patents. Longer term, we believe we can utilize the acquired patents to create innovative and market-disruptive
products for its growing base of adult consumers, including patent protected vaporizer devices and related hardware and software applications.
As
described above, we hope to generate revenue from this acquired intellectual property via licensing and product development activities.
However, there can be no assurance that we will be able to implement this strategy.
Marketing
Strategy
Currently,
we market and place our ENDS products into national distribution channels through long-standing industry relationships in accordance
with the A&R Distribution Agreement and with the assistance of QuikfillRx. We process all sales made to non-retail customers.
Our
long-term marketing strategy remains based on FDA compliance and our commitment to preventing underage access to our ENDS products. As
such, we steer away from social media marketing and, instead, are more focused on ground-level marketing and advertising within authorized
retailer locations (i.e., advertisement on retail partners’ back-bar tobacco products area). Part of this ground-level marketing
effort focuses on supporting our authorized partner stores and distributors in spreading brand awareness of our ENDS products to their
adult (21 years of age and older) consumer base by providing in-store marketing materials.
Retail
stores also have access to online informative videos about the Bidi story, which can be used to educate and assist in training all of
their staff members about the core values of Bidi. From a recycling initiative to the commitment to preventing underage ENDS use, and
stand against the illicit market of ENDS products, we believe that together with Bidi, we are taking the necessary steps to ensure that
our partners are aligned with our community goals.
We
also attend trade shows at established expos throughout the United States and we have a dedicated sales and marketing team that focuses
on these efforts and more.
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We conduct our sales and marketing
activities in close coordination with our consultant QuikfillRx. Pursuant to our Service Agreement with QuikfillRx (most recently amended
as of November 9, 2022), QuikfillRx provides services and support relating to our sales management function (including, without limitation,
services and support relating to business planning and strategy development, staffing and recruitment, training and onboarding, direct
sales and marketing, and monitoring and results evaluation), website development and design, graphics, content, public communication,
social media, management and analytics, and market and other research.
Philip Morris 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-cigarette products based on the intellectual property in certain international markets
set forth in the PMI License Agreement (or the PMI Markets). We have the exclusive international distribution rights to 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 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 costs and expenses 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 payment for the sale of each unit of product manufactured and sold. 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 a percentage 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 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).
These royalties may be initially offset on a limited basis by jointly agreed upon costs such as development costs incurred for entry
to specific international markets.
On August 12, 2023, we executed
and entered into a Deed of Amendment No. 1 (the “PMI License Amendment”) with PMPSA, Bidi and KBI. Pursuant to the PMI License
Amendment (which has an effective date of June 30, 2023), the following material changes have been made to the PMI License Agreement:
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(i) Royalty Rate . The royalty
paid by PMPSA to KBI will no longer be based on sales price of the product being sold, but rather on the volume of liquid contained within
product being sold. The royalty will be on a sliding scale of between $0.08 to $0.16 per sale based on the volume of liquid contained
in the product, increasing to between $0.10 to $0.20 per sale upon meeting certain sales milestones. For purposes of determining aggregate
sales threshold, all sales undertaken since commencement of the PMI Licensing Agreement will be counted.
(ii) Elimination of Certain
Potential Royalty Adjustments . Certain potential adjustments to the royalties receivable by KBI as provided for in the PMI License
Agreement have been eliminated.
(iii) Guaranteed Royalty .
The guaranteed royalty payment owed to KBI under the PMI License Agreement has been eliminated. Instead, royalties will be paid on a
quarterly basis going forward based on actual sales. Any unpaid guaranteed royalty has been cancelled.
(iv) Insurance Tail Requirements .
KBI’s requirement to keep certain tail insurance after the expiration or termination of the PMI Licensing Agreement was reduced
from 6 years to 2 years.
(v) Markets . The identification
of the PMI Markets that PMI may enter has been expanded to cover certain additional territories.
(vi) Net
Reconciliation Payment to KBI . As a result of the changes to the PMI License Agreement described in paragraphs (i) thought (iii)
above, the value of such changes was calculated and reconciled as of the date of commencement of the PMI Licensing Agreement through
June 30, 2023. On September 8, 2023, the Company received the
Net Reconciliation Payment from PMPSA of $134,981 pursuant to this provision. The KBI License Agreement provides that KBI shall pay
Bidi license fees equivalent to 50% of the adjusted earned royalty payments, after any offsets due to jointly agreed costs such
development costs incurred for entry to specific international markets. In March 2023, PMPSA announced the launch of a product (now
called VEEV NOW) under the PMI License Agreement.
In connection with the PMI License
Agreement, we, Bidi, and PMPSA also entered into a 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,
we, Bidi, and PMPSA entered into a guarantee, whereby we and Bidi guarantee 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.
In November 2023, KBI, Bidi and
PMPSA agreed to initiate a pilot project, pursuant to which PMPSA would manufacture up to an agreed upon number of Bidi Sticks with PMI’s
own e-liquid for commercialization in Canada. Based on the results of the pilot, we and PMPSA may consider appropriate changes or amendments
to the PMI License Agreement to accommodate the manufacturing and sales of Bidi Sticks containing PMI e-liquids in Canada. As of the date
of this Report, we do not believe this pilot program is, overall, material to our business or results of operations.
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KBI License Agreements
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 PMI License Agreement.
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 between 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.
Resellers
Currently, our potential distribution
network reach is approximately 48,000 stores in the United States. Our products can be found in many national and regional convenience-store
chains, such as QuikTrip and GPM Investments, as well as at convenience stores (known in the industry as “c-stores”) serviced
through distributors such as S. Abraham and Sons and H.T. Hackney Co. Finally, our products are also accessible to adults 21 years of
age and older through the age-gated digital delivery service mobile application, GoPuff, in more than 50 cities across the United States.
Concentrations
Concentration of Purchases and Other Receivable -
Related Party:
For the year ended October 31,
2023, 100% of the inventories of Products, consisting solely of the BIDI® Stick, were purchased from Bidi, a related party company
that is owned by Nirajkumar Patel, our Chief Science and Regulatory Officer and director, in the amount of approximately $12.8 million,
as compared to $1.5 million for the year ended October 31, 2022.
On October 31, 2023, a credit
of $2,954,470 was applied from the related-party receivable balance to the related party accounts payable balance. After this was applied,
we had no related party receivable balance. As of October 31, 2023, the related party accounts payable balance was $1,5,21,491. In fiscal
year 2023, such inventories accounted for 100% of the total related party accounts payable. There was no related party accounts payable
balance as of October 31, 2022.
Concentration of Revenues and Accounts Receivable:
For the year ended October 31,
2023, a substantial portion of our revenues from the sale of Products, solely consisting of the BIDI® Stick, were derived from the
following customers: (i) GPM Investments generated approximately 15%, (ii) H.T. Hackney Co generated approximately 14%, (iii) FAVS Business,
LLC generated approximately 14%, (iv) C Store Master generated approximately 13%, and (v) QuikTrip Corporation generated approximately
11%.
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For the year ended October 31, 2022, a substantial portion of our revenues
from the sale of Products, solely consisting of the BIDI® Stick were derived from the following customers: (i) Favs Business, LLC
(“Favs Business”) generated approximately 31%, (ii) H.T. Hackney Co. generated approximately 15%, and (iii) GPM generated
approximately 12%. In addition, FAVS Business LLC, C Store Master, and QuikTrip Corporation accounted for approximately 35%, 35%, and
19% of the total accounts receivable from customers, respectively, as of October 31, 2023. Favs Business and QuikTrip Corporation accounted
for approximately 65% and 15% of the total accounts receivable from customers, respectively, as of October 31, 2022.
Environment and Government Regulation Related
to our Operations
Because we are only a wholesale
distributor of products, namely the BIDI® Stick, we are only subject to Federal, state, and international laws pertaining to a distributor,
not a manufacturer, of ENDS products.
Our business is dependent entirely
on the resale of products provided by Bidi; thus, there is a significant risk that our business could be materially adversely affected
if Bidi, as the manufacturer, does not properly abide by any Federal, state, or international laws that regulate ENDS products. Any lapse
in production or availability of products from Bidi would hamper our ability to operate as we would be limited in our ability to supply
our customers if our inventory ran low or ceased to exist entirely.
As a manufacturer of ENDS products,
Bidi is responsible for abiding by and following various rules and regulations pertaining to the manufacturing of the ENDS products we
sell and any lapse in abiding by any pertinent rules and regulations may negatively impact our ability to operate. As a distributor,
we are also subject to various rules and regulations. Some of the below may not directly apply to us at this time due to the nature of
our present operations. These rules and regulations include, but are not limited to, the following:
FDA and Related Regulations Relating to ENDS Products
Effective August 8, 2016, the
FDA’s regulatory authority under The Family Smoking Prevention and Tobacco Control Act was extended to all remaining tobacco products,
including: (i) certain “new generation” products (such as electronic cigarettes, vaporizers, and e-liquids) and their components
or parts (such as tanks, coils, and batteries); (ii) cigars and their components or parts (such as cigar tobacco); (iii) pipe tobacco;
(iv) hookah products; or (v) any other tobacco product “newly deemed” by the FDA (the “Deeming Rule”). The Deeming
Rule applies to all products made or derived from tobacco intended for human consumption but excluding accessories of tobacco products
(such as lighters). Furthermore, starting in April 2022, FDA was also granted authority to regulate products containing synthetic (non-tobacco)
nicotine as tobacco products. Specifically, the Consolidated Appropriations Act of 2022 amended the definition of a “tobacco product”
in the Food, Drug and Cosmetic Act and gave the FDA authority to regulate products containing nicotine from any source, including synthetic
nicotine.
The Deeming Rule requires (i)
United States manufactured products be registered with the FDA and that products include ingredient listings; (ii) newly deemed products
be marketed only after FDA review and authorization, subject to FDA’s compliance enforcement policy; (iii) products only make direct
and implied claims of reduced risk if the FDA authorizes after finding that scientific evidence supports the claim and that marketing
the product will benefit public health as a whole; (iv) sellers of such products refrain from distributing free samples; (v) sellers
of such products implement minimum age and identification restrictions to prevent sales to individuals under age 18 (later extended to
21); (vi) packaging of and advertisements for products include prescribed health warnings; and (vii) sellers refrain from selling Bidi
products in vending machines, unless the machine is located in a facility that never admits youth. We, along with Bidi, must comply with
these regulations. Any lapse in compliance by us, or Bidi, could hamper our ability to operate, which would adversely affect the results
of operations.
Newly deemed tobacco products
are also subject to the other requirements of the Tobacco Control Act, such as Bidi products cannot be adulterated or misbranded. The
FDA could in the future promulgate good manufacturing practice regulations for these and our other products, which could have a material
adverse impact on Bidi’s ability to, and the cost to, manufacture our products, which would adversely affect our financial condition
and results of operations.
Failure to comply with the Tobacco
Control Act and or with any FDA regulatory requirements could result in litigation, criminal convictions or significant financial penalties
and could impair our ability to market and sell our electronic and vaporizer products. At present, we are unable to predict whether the
Tobacco Control Act will impact our products to a greater degree than competitors in the industry, thus affecting our competitive position.
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As part of the “Consolidated
Appropriations Act, 2021,” signed into law on December 27, 2020, Congress amended the PACT Act to apply to ENDS, which includes
the BIDI® Stick. The PACT Act regulates the sale, transfer, or shipment of cigarettes, roll-your-own tobacco, smokeless tobacco,
and now ENDS, for both business-to-business transactions as well as online sales. The PACT Act imposes substantial restrictions on sellers
and shippers of ENDS products, including, but not limited to registration with the Bureau of Alcohol, Tobacco, Firearms and Explosives
(or ATF), registration with state Tobacco Tax Administrators, and monthly reporting requirements to state and local Tobacco Tax Administrators.
Delivery sellers are subject to substantial additional restrictions, including, but not limited to, compliance with state excise tax
collection requirements, licensing requirements, shipping, and packaging requirements. Companies were required to comply with PACT Act
requirements beginning on or about March 28, 2021.
We have adopted the following
compliance measures:
●
We have retained a team
of legal, tax and accounting experts to advise on state and local tax, licensing, and regulatory matters associated with the distribution
of the BIDI ® Stick;
●
We are appropriately licensed
or registered in every state which requires it;
●
We calculate and remit
excise taxes where required;
●
We have made a substantial
investment in excise tax reporting and compliance software to ensure that all applicable taxes are properly calculated and remitted
to the appropriate taxing authorities. The software is now completely integrated with our systems;
●
We have registered with
the ATF and the states into which we ship the products;
●
We have implemented processes
to ensure timely filing of all required reporting; and
●
In February 2021, we ceased
all direct-to-consumer sales.
Federal Trade Commission
The
Federal Trade Commission (FTC) routinely requests various industry sectors to provide information on marketing and advertising practices,
and typically summarizes the aggregate information provided by all respondents in a public report. The FTC issued what is known as an
“Order to File Special Report” to a number of vaping industry members, including Bidi, on June 2, 2022. Upon being advised
of the exclusive distribution arrangement between Bidi and our company, the FTC withdrew the request directed to Bidi on August 22, 2022,
and issued a request to us on August 29, 2022. We responded timely to the FTC request on November 30, 2022.
No further requests were received from the FTC to date.
State and Local Regulations
As a retail seller and/or wholesale
distributor of ENDS and related products, we must follow several state and local regulations. Individual U.S. state laws and regulations
concerning e-cigarette and related products are also relatively new and developing. Currently, certain state laws about e-cigarette and
related products serve to define and/or tax tobacco products or e-cigarette and related products, restrict access to youth and/or retail
sale, require a license to sell such products, ban e-cigarette use in certain public spaces, and require child resistant packaging on
products containing e-liquids. In addition, a number of states and localities have banned the sale of non-tobacco flavored tobacco products.
Recently, for example, California passed Proposition 31, which prohibits the sale of non-tobacco flavored tobacco products, including
e-cigarettes, in retail locations. Thus, the non-tobacco flavored BIDI® Sticks are not permitted to be sold in California retail
locations. We anticipate more states and localities will take this approach. As a distributor, we hold all required state licenses and
permits, and pay all applicable state e-cigarette and related products excise taxes. We work closely with Bidi to ensure that it is compliant
with applicable manufacturer specific state requirements, such as any warning requirements (e.g., California Proposition 65).
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Excise Taxes on Vapor Products
Vapor products are currently subject
to excise taxes at the state and local level. Currently, approximately 31 states, plus various localities and jurisdictions, impose a
tax on vapor products. We anticipate that state and localities will likely continue to impose new excise taxes on these products and
/ or increase existing excise taxes for the purpose of funding various legislative initiatives, filling revenue shortfalls, and / or
to reduce consumption. In addition, while ENDS products are not currently subject to excise tax at the federal level, legislation to
impose excise taxes at the federal level has been introduced in the past and could potentially be adopted in the future. Any future enactment
of excise tax increases at the federal, state, or local level could potentially result in lower consumption, a shift in sales to discount
brands, illicit trade channels or alternatives as consumers seek lower priced products, any of which could result in a decline of our
shipment volume, revenue, and profit. We ceased all direct-to-consumer sales in February 2021.
International Regulations and Pertinent Information
The World Health Organization’s
Framework Convention on Tobacco Control (the “FCTC”) is the first international public health treaty that establishes a global
agenda to reduce initiation of tobacco use and regulate tobacco to encourage tobacco cessation. Over 170 governments worldwide have ratified
the FCTC. The FCTC has led to increased efforts to reduce the supply and demand of tobacco products and to encourage governments to further
regulate the tobacco industry. The tobacco industry expects significant regulatory developments to take place over the next few years,
driven principally by the FCTC. Regulatory initiatives that have been proposed, introduced, or enacted include:
●
the levying of substantial
and increasing tax and duty charges;
●
restrictions or bans on
advertising, marketing, and sponsorship;
●
restrictions or bans on
advertising, marketing, and sponsorship;
●
the display of larger health
warnings, graphic health warnings, and other labeling requirements;
●
restrictions on packaging
design, including the use of colors and generic packaging;
●
restrictions or bans on
the display of tobacco product packaging at the point of sale, and restrictions or bans on cigarette vending machines;
●
requirements regarding
testing, disclosure, and performance standards for tar, nicotine, carbon monoxide, and other smoke constituents’ levels;
●
requirements regarding
testing, disclosure, and use of tobacco product ingredients;
●
increased restrictions
on smoking in public and workplaces and, in some instances, in private places and outdoors;
●
elimination of duty-free
allowances for travelers; and
●
encouraging litigation
against tobacco companies.
If the United States becomes a
signatory to the FCTC and/or national laws are enacted in the United States that reflect the major elements of the FCTC, our business,
results of operations and financial condition could be materially and adversely affected.
Environmental Laws
We may be subject to federal,
state, and local environmental laws and regulations. Compliance with these provisions has not had, nor do we expect such compliance will
have any, material adverse effect upon our capital expenditures, financial condition, or competitive position. We believe that we are
not subject to any material costs for compliance with any environmental laws.
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Competition
Because we solely distribute Bidi’s
products, which comprises all our business operations, Bidi’s competitors in the ENDS industry are indirect competitors of ours.
Many of these competitors in the ENDS industry are better capitalized than we are and have access to greater resources, financial, and
otherwise. We believe that our ability, and Bidi’s ability, to effectively compete in the industry and acquire a strong market
position is, and will continue to be, in large part due to the growing recognition of the Bidi brand name, the perceived quality of each
of our products, and the ongoing efforts of our sales, marketing, and distribution teams. Through Bidi, we compete against, just to name
a few, what we refer to as “big tobacco” companies, including Altria Group, Inc. (formerly Philip Morris); British American
Tobacco p.l.c. (formerly Reynolds); Swedish Match; Swisher International; and manufacturers including U.K. based Imperial Brands, PLC,
NJOY, and Logic Technology. “Big tobacco” has substantially greater resources, and a customer base that has historically
demonstrated loyalty to their brands, which can pose a significant hurdle to competitors operating in the same, or similar, industries.
Competition in the ENDS industry
is based upon not only brand quality and positioning but also on price, packaging, promotion, and retail availability and visibility.
Given the decreasing prevalence and public acceptance of cigarette consumption, the “big tobacco” companies continue to demonstrate
an increased interest and participation in other/additional tobacco industries/markets. As such, we consider the “big tobacco”
companies to be our primary competitors now, but it is our belief that we have the capability to compete successfully.
Intellectual Property
As of the date of this Report, we own the trademarks KAIVAL BRANDS and KAIVAL
LABS. In addition, we purchased certain intellectual property assets of GoFire consisting of various patents, patent applications and
trademarks in exchange for equity securities of our company and certain contingent cash consideration. The purchased assets consist of
19 existing patents and 47 pending patents with novel technologies related to vaporization and inhalation technologies. The patents and
patent applications cover the U.S. and several international territories. The purchased assets also include four registered and two pending
trademarks.
We rely on certain intellectual
property rights, including logos, trademarks, and trade names, of Bidi that were granted to us pursuant to the A&R Distribution Agreement
to be used in connection with the marketing, advertisement, and sale of products. We also indirectly rely on Bidi’s intellectual
property rights related to products, such as patents. If a third-party challenged Bidi’s patents, or infringed upon such rights,
our business would be materially adversely affected.
Employees
As of the date of this Report we have eighteen employees, all of whom are
full-time, including our officers. In addition to our officers, we have employees who fulfill the roles of sales staff, information technology,
web development, warehouse staff, and financial accounting and reporting management. All our employees are eligible to enroll, or have
already enrolled, in our medical plan.
Emerging Growth Company
We are an emerging growth company
(“EGC”), that is exempt from certain financial disclosure and governance requirements for up to five years as defined in
the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). The JOBS Act eases restrictions on the sale of securities
and increases the number of stockholders a company must have before becoming subject to the reporting and disclosure rules of the Securities
and Exchange Commission (the “SEC”). We have not elected to use the extended transition period for complying with new or
revised accounting standards under Section 102(b)(2) of the JOBS Act, which allows us to delay the adoption of new or revised accounting
standards that have different effective dates for public and private companies until those standards apply to private companies.
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Corporate History
We were incorporated on September
4, 2018, in the State of Delaware. Effective July 12, 2019, we changed our corporate name from Quick Start Holdings, Inc. to Kaival Brands
Innovations Group, Inc. The name change was affected through a parent-subsidiary short-form merger of Kaival Brands Innovations Group,
Inc., our wholly-owned Delaware subsidiary formed solely for the purpose of the name change, with and into us. We were the surviving
entity.
2018 Holding Company Reorganization
On September 4, 2018, USSE Delaware,
Inc., a Delaware corporation (“USSE Delaware”) acquired all of our then-outstanding shares of common stock, resulting in
us becoming its wholly owned subsidiary. On September 19, 2018, our wholly owned subsidiary, USSE Merger Sub, Inc., a Delaware corporation
(“USSE Merger Sub”), merged with and into USSE Delaware, our then parent, effected a reorganization (the “Holding Company
Reorganization”) in accordance with the provisions set forth in Section 251(g) of the Delaware General Corporation Law (“DGCL”).
USSE Delaware was the surviving corporation and our wholly owned subsidiary. USSE Delaware also changed its name to USSE Corp. following
the Holding Company Reorganization.
Upon completion of the Holding
Company Reorganization, by virtue of the merger, and without any action on the part of the holder thereof, each share of USSE Delaware’s
common stock issued and outstanding immediately prior to the effective time of the Holding Company Reorganization was automatically converted
into one validly issued, fully paid, and non-assessable share of our Common Stock. Additionally, each share of USSE Delaware’s
preferred stock issued and outstanding immediately prior to the effective time was converted into one validly issued, fully paid, and
non-assessable share of our preferred stock, having the same designations, rights, powers, and preferences, and the qualifications, limitation,
and restrictions thereof, as the corresponding share of USSE Delaware’s preferred stock. Each share of our Common Stock issued
and outstanding and held by USSE Delaware immediately prior to the effective time was canceled.
2018 Change of Control
On October 19, 2018, we issued 500,000,000 shares of restricted Common Stock
and 400,000 shares of Convertible Series B preferred stock to GMRZ Holdings LLC, a Nevada limited liability company (“GMRZ”),
for services rendered to us. GMRZ became our controlling stockholder as a result of such issuances. On February 6, 2019, we entered
into a non-binding Share Purchase Agreement (the “Agreement”) by and among GMRZ, Kaival Holdings, LLC (formerly known as Kaival
Brands Innovations Group, LLC), a Delaware limited liability company (“Kaival Holdings”), and us, pursuant to which, on February
20, 2019, GMRZ sold 504,000,000 shares of our restricted Common Stock, representing approximately 88.06 percent of our then-issued and
outstanding shares of Common Stock, to Kaival Holdings, and Kaival Holdings paid GMRZ consideration in the amount set forth in the Agreement
(the “Purchase Price”). The consummation of the transactions contemplated by the Agreement resulted in a change in control
of us, with Kaival Holdings becoming our largest controlling stockholder. The sole voting members
of Kaival Holdings are Nirajkumar Patel and Eric Mosser (a former executive and director of our company), with Mr. Patel
holding voting control. The Purchase Price was paid with personal funds of the members of Kaival Holdings.
2020 Share Cancellation and
Exchange Agreement
On August 19, 2020, we entered
into a Share Cancellation and Exchange Agreement (the “Share Cancellation and Exchange Agreement”) with our controlling stockholder,
Kaival Holdings.
Pursuant to the Share Cancellation
and Exchange Agreement, Kaival Holdings returned to us 300,000,000 shares of our Common Stock (the “Cancellation Shares”),
which Cancellation Shares were canceled and retired by us. Following such cancellation, Kaival Holdings owns 204,000,000 shares of our
Common Stock.
On August 19, 2020, we filed a
Certificate of Designation of Preferences, Rights, and Limitations of the Series A Preferred Stock (the “Series A Certificate of
Designation”) with the Secretary of State of the State of Delaware, which authorized a total of 3,000,000 shares, par value $0.01
per share, of Series A Preferred Stock (the “Series A Preferred Stock”).
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In exchange for the Cancellation
Shares, we issued 3,000,000 shares (the “Preferred Shares”) of our newly designated Series A Preferred Stock to Kaival Holdings.
The exchange of the Cancellation Shares and the issuance of the Preferred Shares was intended to comply with Section 3(a)(9) of the Securities
Act, in that the issuance was exempt from the registration requirements of the Act because the exchange of the Cancellation Shares for
the Preferred Shares was an exchange between us, as issuer, with an existing stockholder, and no commission or other remuneration was
paid or given directly for the exchange.
2021 Reverse Stock Split
On July 16, 2021, we filed a Certificate
of Amendment to the Amended and Restated Certificate of Incorporation with the Secretary of State of the State of Delaware to affect
a 1-for-12 reverse stock split (the “Reverse Stock Split”) of the shares of our 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 our 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, our Board approved appropriate and proportional adjustments to all outstanding
securities or other rights convertible or exercisable into shares of our 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 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 our Common Stock was not affected by the Reverse Stock Split.
2022 Series A Preferred Shares
Converted
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 was convertible into approximately 0.3968 shares of Common Stock. On June 24, 2022, all 3,000,000 shares
of Series A Preferred Stock were converted into shares of Common Stock by Kaival Holdings, our majority stockholder. The conversion of
3,000,000 shares of Series A Preferred Stock, at a conversion rate of 0.3968, equaled 1,190,477 shares of Common Stock. As a result, the
authorized, preferred stock of the Company consists of 5,000,000 shares with a par value of $0.001 per share, with 0 shares of preferred
stock issued or outstanding as of October 31, 2022.
May 2023 GoFire Asset Purchase
Agreement
On May 30, 2023, we and Kaival
Labs entered into an Asset Purchase Agreement (the “GoFire APA”) with GoFire. Pursuant
to the terms of the GoFire APA, we, through Kaival Labs, purchased certain intellectual property assets of GoFire consisting of various
patents, patent applications and trademarks in exchange for equity securities of our company and certain contingent cash consideration.
The purchased assets consist of 12 existing patents and 46 pending patents with novel technologies related to vaporization and inhalation
technologies. The patents and patent applications cover the U.S. and several international territories. The purchased assets also include
four registered and two pending trademarks. We have determined that the acquisition of the purchased assets does not constitute the acquisition
of a “business” (as defined in Rule 11-01(d) of Regulation S-X).
Pursuant to the terms of the GoFire APA, we paid to GoFire, in addition to certain
contingent cash consideration described below, consideration in the form of equity securities of our company consisting of (i) an aggregate
of 95,239 shares of Common Stock (the “2023 APA Shares”); (ii) 900,000 shares of newly-designated Series B Convertible
Preferred Stock, par value $0.001 per share, (the “Series B Preferred Stock” and the shares of Common Stock underlying the
Series B Preferred, the “Series B Conversion Shares”), the rights, preferences and terms of which are set forth in a Certificate
of Designation of Rights and Preferences of the Series B Preferred Stock, and (iii) a Common Stock purchase warrant to purchase 95,239
shares of Common Stock (the “Warrant” and the shares of Common Stock underlying the Warrant, the “Warrant Shares”).
As additional consideration for the purchased assets, any cannabis-specific (meaning cannabis, hemp or cannabinoid) royalties that are
generated by Kaival Labs from or due to the purchased assets, from May 30, 2023, until January 1, 2027, will be subject to a contingent
cash payment as described in the GoFire APA and subject to the terms of the GoFire APA. 9,524 2023 APA Shares and a Warrant for 9,524
Warrant Shares were issued to an advisor to GoFire at the closing of the GoFire APA.
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Pursuant to the GoFire APA, we
are required to use commercially reasonable efforts to register the 85,715 2023 APA Shares and 85,715 Warrants and Warrant Shares with
the SEC for distribution to GoFire’s stockholders and/or public resale by such stockholders within 180 days of May 30, 2023. Such
registration was declared effective by the SEC on January 12, 2024. To our knowledge, portions of the 85,715 2023 APA Shares and 85,715
Warrants have been distributed to the GoFire stockholders pursuant to such registration statement.
In addition, if any Series B Preferred
Stock remains outstanding nineteen (19) months after May 30, 2023, we shall use commercially reasonable efforts to file with the SEC subsequent
registration statement registering the distribution to GoFire’s stockholders and/or public resale Series B Conversion Shares by
such stockholders. If such subsequent registration statement is required, we will use our commercially reasonable efforts to obtain effectiveness
of such subsequent registration statement within nineteen (19) months of May 30, 2023, and if we do not so register the Series B Conversion
Shares within nineteen (19) months of May 30, 2023, we will issue to GoFire or its designee an additional ten percent (10%) of all of
the Series B Conversion Shares underlying the then-outstanding shares of Series B Preferred Stock.
All of the securities issued as
consideration for the GoFire purchased assets were subject to a lock-up agreement that terminated on November 26, 2023.
2024 Reverse Stock Split
On January 22, 2024, we filed
a Certificate of Amendment to the Amended and Restated Certificate of Incorporation with the Secretary of State of the State of Delaware
to affect a 1-for-21 reverse stock split (the “2024 Reverse Stock Split”) of the shares of our Common Stock. The 2024 Reverse
Stock Split became effective on January 25, 2024 on the Nasdaq Stock Market. No fractional shares were issued in connection with the 2024
Reverse Stock Split. Any fractional shares of our Common Stock that would have otherwise resulted from the 2024 Reverse Stock Split were
rounded up to the nearest whole number. In connection with the 2024 Reverse Stock Split, our Board approved appropriate and proportional
adjustments to all outstanding securities or other rights convertible or exercisable into shares of our Common Stock, including, without
limitation, all preferred stock, warrants, options, and other equity compensation rights. The par value per share of our Common Stock
was not affected by the 2024 Reverse Stock Split.
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