Item 1A. Risk Factors
Item 1A. Risk Factors.
Our business and an investment
in our company is speculative and subject to significant risks . We caution you that the following important factors, among
others, could cause our actual results to differ materially from those expressed in forward-looking statements made by us or on our behalf
in filings with the SEC, press releases, communications with investors and oral statements. Any or all of our forward-looking statements
contained in this Report and in any other public statements we make may turn out to be wrong. They can be affected by inaccurate assumptions
we might make or by known or unknown risks and uncertainties. Many factors mentioned in the discussion below will be important in determining
future results. Consequently, no forward-looking statement can be guaranteed. Actual future results may differ materially from those anticipated
in forward-looking statements. We undertake no obligation to update any forward-looking statements, whether as a result of new information,
future events or otherwise. You are advised, however, to consult any further disclosure we make in our reports filed with the SEC.
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Risks Related to the Business Combination
Completion of the Business Combination
is subject to a number of conditions and if these conditions are not satisfied or waived, such transactions will not be completed.
Kaival’s obligation
and the obligation of Delta to complete the Business Combination are subject to satisfaction or waiver of a number of conditions, including,
among others:
● approval
of the Business Combination by Kaival’s stockholders;
● absence
of injunctions or certain legal impediments;
● approval
for the listing on NASDAQ of Pubco’s ordinary shares to be issued in the Business Combination; and
● accuracy
of the representations and warranties of each of the parties, subject to certain materiality thresholds.
There can be no assurance
that the conditions to closing set forth in the Merger Agreement will be satisfied or waived or that the Business Combination itself will
be completed.
Failure to complete the Business Combination
could negatively impact Kaival’s stock price, future business or operations.
If the Business Combination
is not completed, Kaival may be subject to a number of material risks, including the following:
● Kaival
may be required under certain circumstances to pay Delta a termination fee;
● the
price of Kaival’s common stock may decline to the extent that the relevant current market price reflects a market assumption that
the Business Combination will be completed; and
● costs
related to the Business Combination, such as legal, accounting, certain financial advisory and financial printing fees, must be paid even
if the Business Combination is not completed.
Further, if the Business Combination
is terminated and either company’s board of directors determines to seek another merger or business combination, there can be no
assurance that it will be able to find a partner on terms as attractive as those provided for in the Merger Agreement. In addition, while
the Merger Agreement is in effect and subject to very narrowly defined exceptions, Kaival is prohibited from soliciting, initiating or
encouraging or entering into certain extraordinary transactions, such as a merger, sale of assets or other business combination, other
than with Delta.
The exercise of Kaival’s boards
of directors’ and officers’ discretion in agreeing to changes or waivers in the terms of the Business Combination may result
in a conflict of interest when determining whether such changes to the terms of the Business Combination or waivers of conditions are
appropriate and in Kaival’s shareholders’ best interests.
In the period leading up to
the closing of the Business Combination, events may occur that, pursuant to the Merger Agreement, would require Kaival and/or Delta to
agree to amend the Merger Agreement, to consent to certain actions taken by Delta or Kaival, as applicable, or to waive rights that Kaival
or Delta is entitled to under the Merger Agreement. Such events could arise because of changes in the course of Kaival’s or Delta’s
business, a request by Kaival or Delta to undertake actions that would otherwise be prohibited by the terms of the Merger Agreement or
the occurrence of other events that would have a material adverse effect on Kaival’s or Delta’s business. In any of such circumstances,
it would be at Kaival’s or Delta’s discretion, acting through their respective board of directors, to grant consent or waive
those rights. The existence of the financial and personal interests of the directors of Kaival described in the preceding risk factors
may result in a conflict of interest on the part of one or more of the directors between what they may believe is best for Kaival and
its stockholders and what he or they may believe is best for themselves in determining whether or not to take the requested action.
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The Company will incur
significant transaction and transition costs in connection with the Business Combination.
The Company has incurred and expect to incur significant,
non-recurring costs in connection with consummating the Business Combination, including legal, accounting, consulting, investment banking
and other fees, expenses and costs. In addition, PubCo will incur significant costs operating as a public company following the consummation
of the Business Combination and may also incur additional costs to retain key employees. Generally, transaction expenses incurred in connection
with the Business Combination will be paid by the party incurring those expenses, and many of those expenses might not be paid until after
the Closing. Accordingly, these expenses could result in Holdings having less money following the Closing to spend on other aspects of
its business, particularly if the actual expenses turn out to be higher than anticipated.
Legal proceedings in
connection with the Business Combination, the outcomes of which are uncertain, could delay or prevent the completion of the business combination.
In connection with business combination transactions
like the proposed Business Combination, it is not uncommon for lawsuits to be filed against the parties and/or their respective directors
and officers alleging, among other things, that the proxy statement/prospectus provided to shareholders contains false and misleading
statements and/or omits material information concerning the transaction. Although no such lawsuits have yet been filed in connection with
the Business Combination, it is possible that such actions may arise and, if they do arise, to seek, among other things, injunctive relief
and an award of attorneys’ fees and expenses. Defending such lawsuits could require us and Delta to incur significant costs and
draw the attention of our and Delta’s management teams away from the consummation of the Business Combination and the management
of their respective businesses. Further, the defense or settlement of any lawsuit or claim that remains unresolved at the time the Business
Combination is consummated may adversely affect Pubco’s business, financial condition, results of operations and cash flows. Such
legal proceedings could delay or prevent the Business Combination from being consummated within the expected timeframe.
After the Business
Combination, Pubco may be exposed to unknown or contingent liabilities and may be required to take write-downs or write-offs, restructuring
and impairment or other charges that could have a significant negative effect on its financial condition, results of operations and share
price.
It is possible that the due diligence conducted in
relation to Kaival and Delta and their respective businesses has not identified all material issues or risks associated with Kaival and
Delta or the industries in which they compete.
Furthermore, factors outside of the parties’
control could arise later. As a result of these factors, Pubco may be exposed to liabilities and incur additional costs and expenses and
be forced to later write-down or write-off assets, restructure operations, or incur impairment or other charges that could result in losses.
Even if the due diligence has identified certain risks, unexpected risks may arise and previously known risks may materialize in a manner
not consistent with the parties’ preliminary risk analysis. If any of these risks materialize, this could have a material adverse
effect on the Pubco’s financial condition and results of operations and could contribute to negative market perceptions about Pubco’s
securities.
Due to potential fluctuations
in the market value of Pubco Ordinary Shares, Kaival stockholders cannot be sure of the market value of the consideration that they will
receive in the Business Combination.
The current shareholders of Delta (the “Delta
Shareholders”) and the Kaival stockholders are expected to own, immediately following consummation of the Business Combination,
approximately 90% (inclusive of shares to be distributed to advisors) and 10% of Holdings, respectively.
Prior to the Closing, there has not been and will
not be an established public trading market for Pubco Ordinary Shares. The market value of Pubco Ordinary Shares will reflect the combination
of Kaival and Delta under the terms of the Business Combination. Further, the merger consideration to be received by Kaival stockholders
will not be adjusted to reflect any changes in the number of shares of Kaival common stock outstanding, the market value of Kaival common
stock or currency exchange rates.
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Changes in the price of our common stock may result
from a variety of factors, including, among others, changes in our business, operations or prospects, regulatory considerations, governmental
actions, legal proceedings and general business, market, industry, political or economic conditions. Many of these factors are beyond
our control. As a result, the aggregate market value of the Pubco Ordinary Shares that a Kaival stockholder is entitled to receive at
the Closing could vary significantly from the value of the equivalent shares of our common stock on the date of the Merger Agreement,
the date of this report or at other times, and Kaival stockholders will neither know nor be able to calculate the value of the merger
consideration they would receive upon the Closing. Kaival stockholders are urged to obtain current market quotations for our common stock.
Termination of the
Merger Agreement could negatively impact Kaival.
If the Business Combination is not completed for any
reason, including as a result of Kaival stockholders declining to adopt the Merger Agreement or declining to approve the proposals required
to effect the Business Combination, the ongoing business of Kaival may be adversely impacted and, without realizing any of the anticipated
benefits of completing the Business Combination, Kaival would be subject to a number of risks, including the following:
●
we
may experience negative reactions from the financial markets, including negative impacts on our stock price (including to the extent
that the current market price reflects a market assumption that the Business Combination will be completed);
●
we
will have incurred substantial expenses and will be required to pay certain costs relating to the Business Combination, whether or
not the Business Combination is completed; and
●
since
the Merger Agreement restricts the conduct of our business prior to completion of the Business Combination, we may not have been
able to take certain actions during the pendency of the Business Combination that would have benefitted it as an independent company,
and the opportunity to take such actions may no longer be available.
Risks Related to Our Business and Industry
If the claims against the Company and Bidi that
have been filed with the International Trade Commission are successful, the Company and Bidi could be prohibited from importing and selling
the Bidi Stick in to the United States.
On June 11, 2024, RAI Strategic Holdings, Inc., R.J. Reynolds Vapor Company,
R.J. Reynolds Tobacco Company, and RAI Services Company (collectively, the “RJ Reynolds Entities”) filed a patent infringement
complaint with the International Trade Commission (the “ITC”) against Bidi, us, and forty (40) other respondents (the “ITC
Complaint”) pursuant to Section 337 of the Tariff Act of 1930, as amended. Specifically, the ITC Complaint alleges that one or more
components or elements of the Bidi Stick infringe U.S. Patent No. 11,925,202, which is owned by one of the RJ Reynolds Entities. The ITC
Complaint requests the ITC grant: (a) temporary and permanent limited exclusion orders pursuant to Section 337(e) of the Tariff Act of
1930, as amended, which would prohibit the importation of the Bidi Stick in the United States; and (b) issue temporary and permanent cease
and desist orders pursuant to 337(f) of the Tariff Act of 1930, as amended, which would prohibit the sale and distribution of the Bidi
Stick in the United States. On July 17, 2024, the Company was dismissed from the ITC proceeding and is no longer a defendant in the ITC
proceeding. No damages are recoverable in the proceedings before the ITC. On November 1, 2024, Bidi stipulated to a consent order
prohibiting Bidi from selling for import, importing, or selling after importation the Bidi Stick. The ITC entered the consent order
on December 6, 2024.
Our Business may permanently
suffer as a result of the ITC Complaint
As a result of the ITC Complaint, Bidi no longer imports the Bidi Stick and
we do not expect that we will have access to the Bidi Stick in the foreseeable future. Since we have been unable to sell the Bidi Stick
our revenues have declined. We may not ever be able to increase our revenues to the levels they were at when we were able to sell Bidi
Sticks, as a result our business may not financially recover in the near term.
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We have a present need
for additional funding, which raises questions about our ability to continue as a going concern. We may be unable to raise capital when
needed, which would force us to delay, reduce or eliminate aspects of our business or cause our business to fail.
As of October 31, 2024, we
had cash and cash equivalents of approximately $3.9 million. We believe that based on our current operating plan, our existing cash
and cash equivalents will only be sufficient to enable us to fund our operations and other obligations for a very limited period. See
“Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”
Moreover, we will need significant
additional funds to satisfy our outstanding payables, fund our working capital, and fully implement our business plan as we seek to grow
our revenues and ultimately achieve positive cash flow and profitability. In addition, our ability to continue as a going concern is adversely
affected by the uncertainty surrounding Bidi’s PMTA process with FDA and outcome of Bidi petition with the 11th Circuit Court of
Appeals regarding the FDA’s January 2024 MDO relating to Classic Bidi ® Stick as well as our negative cash flows from
operations, significant recurring losses and present need for additional funding. All of these factors raise substantial doubt regarding
our ability to continue as a going concern.
There is therefore a material risk that we will be unable to generate sufficient
revenues to pay our expenses, and if our existing sources of cash and cash flows are insufficient to fund our activities, we will need
to raise additional funds. Additional equity or debt financing may not be available on acceptable terms, if at all, particularly in the
current economic environment.
Until such time, if ever,
we can generate substantial product revenues, we will be required to finance our cash needs through public or private equity offerings,
debt financings and corporate collaboration and licensing arrangements. If we elect to raise additional funds by issuing equity securities,
our stockholders may experience dilution. Debt financing, if available, may involve agreements that include covenants limiting or restricting
our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. Any debt
financing or additional equity that we may raise may contain terms, such as liquidation and other preferences, that are not favorable
to us or our stockholders. If we raise additional funds through collaboration and licensing arrangements with third parties, it may be
necessary to relinquish valuable rights to our technologies, research programs or product candidates or grant licenses on terms that may
not be favorable to us.
If we are unable to generate cash flow positive operations
or achieve profitability, and if we are unable to raise additional funds on commercially reasonable terms or at all, we may be required
to significantly reduce or cease our operations, declare bankruptcy or our business could fail, which could result in the loss to investors
of their investment in our securities.
The terms of our agreements with Bidi, including
our A&R Distribution Agreement, may not always be as favorable to us as the terms that may be obtained by arms’ length negotiation.
We currently are, and we anticipate that we will continue
to be, substantially dependent on our relationships with our affiliated entities, including Bidi. We believe that our current arrangement
with Bidi provides our business with stability and transparency. Although we believe that the terms of the A&R Distribution Agreement
are as favorable to us as what we could have obtained in an arm’s length transaction, there can be no assurance that this arrangement
or any future agreements that we enter with Bidi, or any other affiliated entity, will be as favorable to us as we may be able to negotiate
with unaffiliated parties.
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We rely primarily on Bidi for access to our
key intellectual property rights, and any change in our relationship could adversely alter such rights or our access to them.
We currently have no intellectual property rights
other than the intellectual property assets we acquired in May 2023 from GoFire and our trademarks KAIVAL BRANDS and KAIVAL LABS. We rely
on the 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 the Bidi products. We also indirectly rely
on Bidi’s intellectual property rights related to the Bidi products, such as patents. We have from time to time considered, and
discussed with Bidi, potential alterations to this arrangement, including a potential acquisition by us of all or a portion of the intellectual
property owned by Bidi and related to Bidi products. Should we pursue such a transaction, it would be a “related party transaction,”
as defined by the listing rules of Nasdaq and, thus, subject to the review of the Audit Committee of our Board (or, if deemed appropriate,
a special Board committee comprised of disinterested directors). Further, should we undertake such a transaction, then we would become
responsible to respond if a third-party challenged Bidi’s patents, or infringed upon such rights, in which case our business could
be materially adversely affected.
We have a limited operating history, and our
historical operating and financial results may not be indicative of future performance, which, along with the relative early stage of
the ENDS industry, makes it difficult to predict our future business prospects and financial performance.
Our current business model is relatively new, and
so business and prospects may be difficult to evaluate. Our limited operating history makes it difficult to evaluate both our operating
history and our future potential. We have yet to demonstrate a consistent ability to generate revenue, and are still subject to many of
the risks common to early-stage companies operating in the nicotine and non-nicotine delivery system products sector, including the uncertainty
as to our ability to implement our business plan, market acceptance of business plan, under-capitalization, cash shortages, limitations
with respect to personnel, financing and other resources and uncertainty of our ability to generate revenues. There is therefore a significant
risk that our activities will not result in any material revenues or profit, and the likelihood of our business viability and long-term
prospects must be considered in light of the stage of our development. There can be no assurance that we will be able to fulfill our stated
business strategy and plans, or that financial, technological, market, or other limitations may force us to modify, alter, significantly
delay, or significantly impede the implementation of such plans. We have insufficient results of operations in our current business model
for investors to use to identify historical trends. Investors should consider our prospects considering the risk, expenses and difficulties
we will encounter as an early-stage company. Our revenue and income potential is unproven and our business model is continually evolving.
We are therefore subject to the risk that we will be unable to address these risks, and our inability to address these risks could lead
to the failure of our business.
Our business is rapidly evolving and is particularly
at risk given the FDA’s January 2024 MDO for Classic BIDI® Stick or in the event that Bidi’s pending PMTA for non-tobacco
flavored BIDI® Sticks is denied or delayed.
The ENDS industry is relatively new and is rapidly
evolving, and the FDA has been aggressive in its oversight of the ENDS industry. Changes in existing laws, regulations and policies and
the issuance of new laws, regulations, policies, as well as the FDA’s actions on ENDS-related PMTAs (including Bidi’s) and
any other entry barriers in relation to the ENDS industry may materially and adversely affect our ability to conduct business and our
results of operations.
Bidi was among the many companies that received a MDO for its non-tobacco flavored
BIDI ® Sticks. On August 23, 2022, the U.S. Court of Appeals for the Eleventh Circuit set aside (i.e., vacated) the MDO
issued to the non-tobacco flavored BIDI® Sticks and remanded Bidi’s PMTA back to FDA for further review.
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However, there is a risk that Bidi’s PMTA for non-tobacco flavored BIDI® Sticks will be
denied, which would have a significant adverse effect on our business and could lead to our bankruptcy or the failure of our business
entirely.
Separately, on or about May 13, 2022, FDA placed the
tobacco-flavored Classic BIDI® Stick into the final Phase III scientific review. In March 2023, FDA issued a deficiency letter regarding
the Classic BIDI® Stick PMTA, to which Bidi submitted a timely response in June 2023. Subsequently, on January 22, 2024, FDA issued
a MDO for the Classic BIDI® Stick. On January 26, 2024, Bidi filed a petition for review of the MDO with the 11 th Circuit
Court of Appeals, followed by a motion to stay the MDO. Bidi is arguing, among other things, that the MDO was arbitrary and capricious
in violation of the Administrative Procedure Act. On February 2, 2024, Bidi filed a Time Sensitive Motion for a Stay Pending Review, which
the court denied on February 18, 2024. The case is now proceeding on the merits, with Bidi’s opening merits brief filed on April
15, 2024. FDA filed its response brief on June 7, 2024, and Bidi filed its reply brief on July 29, 2024. The 11 th Circuit has
indicated that the oral argument will be held in April 2025. The Company cannot provide any assurances as to the timing or outcome. Unless
the MDO is ultimately remanded by the 11 th Circuit, the Classic BIDI® Stick is considered an adulterated tobacco product
the continued marketing and distribution of which is prohibited.
If it is determined or perceived that the usage
of ENDS products poses long-term health risks, the use of ENDS products may decline significantly, which may materially and adversely
affect our business, financial condition, and results of operations.
Negative publicity on the health consequences of ENDS
products or other similar devices may also adversely affect the usage of ENDS products. For example, the FDA and the United States Centers
for Disease Control and Prevention (“CDC”) issued a joint statement on August 30, 2019, linking a number of cases of respiratory
illnesses to ENDS product use. On November 8, 2019, the CDC announced that it had preliminarily linked cases of severe respiratory illness
to the presence of Vitamin E acetate, which was found in certain Tetrahydrocannabinol (THC)-containing ENDS cartridges for non-electronic
nicotine delivery systems (non-ENDS) products that may have been obtained illegally. However, evidence is not sufficient to rule out the
contribution of other chemicals of concern, including chemicals in either THC or non-THC products (THC is the
principal psychoactive constituent of cannabis) . In January 2020, after further research, the FDA and CDC recommended against the
use of THC-containing ENDS products, especially those from unofficial sources, and that the underage, pregnant women and adults who do
not currently use tobacco products should not start using ENDS products. On February 25, 2020, the CDC issued a final update, stating
that the number of cases of severe respiratory illnesses had declined to single digits as of February 9, 2020. The CDC also reconfirmed
that (i) Vitamin E acetate, which was found in some THC-containing ENDS cartridges for non-ENDS ENDS products that were mostly obtained
illegally, was strongly linked to and indicated to be the primary cause of the severe respiratory illnesses, and (ii) THC-containing ENDS
products from informal sources were linked to most cases of severe respiratory illnesses. Furthermore, there have been recent claims that
users of ENDS products may suffer a greater risk of more serious COVID-19 complications. However, it remains unclear whether the exposure
to toxic chemicals through ENDS product usage will increase the risk of COVID-19.
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Research regarding the actual causes of these illnesses
is still ongoing. If ENDS product usage is determined or perceived to pose long-term health risks or to be linked to illnesses, the usage
of ENDS products may significantly decline, which would have a material adverse effect on our business, financial condition, and results
of operations. Although we currently do not offer products containing THC, any perceived correlation between THC and Vitamin E acetate
may adversely affect the public’s perception of ENDS products in general, regardless of whether such products contain THC and/or
Vitamin E.
We do not expect the assets acquired from GoFire
will generate immediate revenue for us, and we may never be able to develop these assets into revenue generating products.
We purchased a certain vaporizer and inhalation-related
patent portfolio from GoFire in May 2023 with the goal of diversifying our business and lessening our dependence on Bidi. We do not expect
that the acquired assets will generate immediate revenue for us. While we will seek to monetize the acquired intellectual property, including
through third-party licensing opportunities, we can give no assurances at this time that either (i) the patent applications we acquired
will result in issued patents or (ii) we will be able to successfully monetize these assets. Our failure to capitalize on our GoFire assets
would materially impair our strategy of diversifying our product offerings, leaving us even more reliant on the products we distribute
for Bidi.
We may not be successful in maintaining the
consumer brand recognition and loyalty of our products and face intense competition and may fail to compete effectively.
We compete in a market that relies on innovation and
the ability to react to evolving consumer preferences and, thus, are subject to significant competition in the ENDS market, and larger
tobacco industry and compete against companies in such market and industry that have access to significant resources in terms of technology,
relationships with suppliers and distributors and access to cash flow and financial markets.
Consumer perceptions of the overall safety of tobacco,
nicotine, cannabis, and hemp/CBD-related products is likely to continue to shift, and our success depends, in part, on our ability to
anticipate these shifting tastes and the rapidity with which the markets in which we compete will evolve in response to these changes
on a timely and affordable basis. If we are unable to respond effectively and efficiently to changing consumer preferences, the demand
for our products may decline, which could have a material adverse effect on our business, results of operations, and financial condition.
Regulations may be enacted in the future, particularly
considering increasing restrictions on the form and content of marketing of tobacco products, that would make it more difficult to appeal
to our consumers or to leverage existing recognition of the Bidi brand, or other brands that we own or license in the future. Furthermore,
even if we can continue to distinguish our products, there can be no assurance that the sales, marketing, and distribution efforts of
our competitors will not be successful in persuading consumers of our products to switch to their products. Many of our competitors have
greater access to resources than we do, which better positions them to conduct market research in relation to branding strategies or to
launch costly marketing campaigns. Any loss of consumer brand loyalty to our products or reduction of our ability to effectively brand
our products in a recognizable way will have a material effect on our ability to continue to sell our products and maintain our market
share, which could have a material adverse effect on our business, results of operations, and financial condition.
The competitive environment and our competitive position
are also significantly influenced by economic conditions, the state of consumer confidence, competitors’ introduction of low-priced
products or innovative products, higher taxes, higher absolute prices, and larger gaps between price categories and product regulation
that diminishes the consumer’s ability to differentiate tobacco products. Due to the impact of these factors, as well as higher
state and local excise taxes and the market share of deep discount brands, the tobacco industry has become increasingly price competitive.
As we seek to adapt to the price competitive environment, our competitors that are better capitalized may be able to sustain price discounts
for long periods of time by spreading the loss across their expansive portfolios, with which we are not positioned to compete.
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“Big tobacco” has also established its
presence in the ENDS market and has begun to make investments in the alternative space. There can be no assurance that our products will
be able to compete successfully against these companies or any of our other competitors, some of which have far greater resources, capital,
experience, market penetration, sales and distribution channels than do we.
Our distribution efforts rely in part on our
ability to leverage relationships with large retailers and national chains.
Our distribution efforts rely in part on our ability
to leverage relationships with large retailers and national chains to sell and promote our products, which is dependent upon the strength
of the Bidi brand name and, in the future, any brand names that we may own or license, and our salesforce effectiveness. To maintain these
relationships, we must continue to supply products that will bring steady business to these retailers and national chains. We may not
be able to sustain these relationships or establish other relationships with such entities, which could have a material adverse effect
on our ability to execute our branding strategies, our ability to access the end-user markets with our products, or our ability to maintain
our relationships with the manufacturer and sub-distributors of our products. For example, if we are unable to meet benchmarking provisions
in certain of our contracts or if we are unable to maintain and leverage our retail relationships on a scale sufficient to make us an
attractive distributor, it would have a material adverse effect on our ability to act as sole distributor for Bidi, and on our business,
results of operations and financial condition.
In addition, there are factors beyond our control
that may prevent us from leveraging existing relationships, such as industry consolidation. If we are unable to develop and sustain relationships
with large retailers and national chains or are unable to leverage those relationships due to factors such as a decline in the role of
brick-and-mortar retailers in the North American economy, our capacity to maintain and grow brand and product recognition and increase
sales volume will be significantly undermined. In such an event, we may ultimately be forced to pursue and rely on local and more fragmented
sales channels, which will have a material adverse effect on our business, results of operations and financial condition.
Competition from illicit sources may have an
adverse effect on our overall sales volume, restricting the ability to increase selling prices and damaging brand equity.
Illicit trade and tobacco trafficking in the form
of counterfeit products, smuggled genuine products, and locally manufactured products on which applicable taxes or regulatory requirements
are evaded, represent a significant and growing threat to the legitimate tobacco industry and significant, and unfair, competition that
we are faced with. Moreover, factors such as increasing tax regimes, regulatory restrictions, and compliance requirements are encouraging
more consumers to switch to illegal, cheaper tobacco-related products, and providing greater rewards for smugglers. All of these factors
based on illicit trade have had and may continue to have an adverse effect on our overall sales volume, may restrict the ability to increase
selling prices, damage our brand equity, and may lead to commoditization of our products. If we are unable to manage the risks posed by
illicit competition, our results of operation and overall business may suffer.
Our products are regulated by the FDA, which has broad regulatory
powers. Increases in tobacco-related taxes have been proposed or enacted and are likely to continue to be proposed or enacted in numerous
jurisdictions.
Tobacco products, premium cigarette papers, and tubes
have long been subject to substantial federal, state, and local excise taxes. Such taxes have frequently been increased or proposed to
be increased, in some cases significantly, to fund various legislative initiatives or further disincentivize tobacco usage. Since 1986,
smokeless products have been subject to federal excise tax. Federally, smokeless products are taxed by weight (in pounds or fractional
parts thereof) manufactured or imported. Any increases in tobacco-related taxes may materially adversely affect the demand for our products.
The market for ENDS products is subject to a
great deal of uncertainty and is still evolving.
ENDS products, having recently been introduced to
market over the past 10 to 15 years, are at a relatively early stage of development, and represent core components of a market that is
evolving rapidly, highly regulated, and characterized by a number of market participants. Rapid growth in the use of, and interest in,
ENDS products is recent, and may not continue on a lasting basis. The demand and market acceptance for these products is subject to a
high level of uncertainty. Therefore, we are subject to all the business risks associated with a new enterprise in an evolving market.
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For example, ENDS products that are non-tobacco flavored
continue to face the threat of prohibition at the local level, as many state and local authorities and attorneys general push for bans
or request the FDA to deny a PMTA for flavored ENDS. To date, at least nine states, including the District of Columbia, have banned the
sale of flavored ENDS (e.g., California, Massachusetts, Illinois, New Jersey, New York, Rhode Island, and Utah), with several more considering
similar bans (e.g., Maryland and Connecticut). As the September 9, 2021, PMTA review deadline has now passed, the FDA has implemented
a de facto ban of non-tobacco flavored ENDS by denying over 99% of pending applications, while issuing marketing authorizations for only
two non-tobacco flavored (menthol) ENDS.
If flavors are ultimately prohibited to be sold by
Bidi in the United States, the use of ENDS products may decline significantly, which may materially and adversely affect our business,
financial condition, and results of operations. Continued evolution, uncertainty, and the resulting increased risk of failure of our new
and existing product offerings in this market could have a material adverse effect on our ability to build and maintain market share and
on our business, results of operations and financial condition.
Some of our product offerings through Bidi are
subject to developing and unpredictable regulation.
Our products are sold through our distribution network
and may be subject to uncertain and evolving federal, state, and local regulations, including hemp, non-THC cannabidiol (CBD) and other
non-tobacco consumable products. Enforcement initiatives by those authorities are therefore unpredictable and impossible to anticipate.
We anticipate that all levels of government, which have not already done so, are likely to seek in some way to regulate these products,
but the type, timing, and impact of such regulations remains uncertain. These regulations include or could include restrictions including
prohibitions on certain form factors, such as smokable hemp products, or age restrictions. On January 26, 2023, The FDA announced that
it would not initiate rulemaking to regulate CBD as a dietary food ingredient. Rather, after careful review, the FDA has concluded that
a new regulatory pathway for CBD is needed that balances individuals’ desire for access to CBD products with the regulatory oversight
needed to manage risks. The FDA further indicated that it is prepared to work with Congress on this matter. Accordingly, we cannot give
any assurance that such actions would not have a material adverse effect on this emerging business.
Significant increases in state and local regulation
of our products have been proposed or enacted and are likely to continue to be proposed or enacted in numerous jurisdictions. The Prevent
All Cigarette Trafficking (or PACT) Act, which went into effect in June 2010, amended the Jenkins Act and initially only applied to the
sales of cigarettes, roll-your-own tobacco, and smokeless tobacco. Specifically, the PACT Act regulates the sale, transfer, or shipment
of these products for both business-to-business transactions as well as “delivery sales,” which are defined as any sale of
cigarettes, roll-your-own tobacco, or smokeless tobacco where the consumer orders the product remotely and prohibits such deliveries through
the U.S. Postal Service (or USPS), except in certain circumstances ( e.g., business-to-business deliveries).
Under the enactment of the Preventing Online Sales
of E-Cigarettes to Children Act (part of the larger 2021 Consolidated Appropriations Act), effective March 27, 2021, the definition of
“cigarettes” in the PACT Act was amended to include ENDS, which is defined as “any electronic device that, through an
aerosolized solution, delivers nicotine, flavor, or any other substance to the user inhaling from the device,” including “an
e-cigarette; an e-hookah; an e-cigar; a vape pen; an advanced refillable personal vaporizer; an electronic pipe; and any component, liquid,
part, or accessory of a device described above, without regard to whether the component, liquid, part, or accessory is sold separately
from the device.” As such, delivery sales of the BIDI ® Stick are subject to the PACT Act.
The PACT Act requires all sellers to register with
the ATF, as well as the tobacco tax administrators of the states into which a shipment is made or in which an advertisement or offer is
disseminated. Delivery sellers who ship cigarettes (including ENDS) or smokeless tobacco to consumers are further required to label packages
as containing tobacco, verify the age, and identity of the customer at purchase, use a delivery method (other than through the USPS) that
checks ID and obtains adult customer signature at delivery, and maintain records of delivery sales for a period of four years after the
date of sale, among other things. Delivery sellers are also required to file a monthly report with the state tobacco tax administrator
and any other local or tribal entity that taxes the sale of the products. Such reports must include the name and address of the persons
delivering and receiving the shipment and the brand and quantity of the “cigarettes” that were shipped. These requirements
apply to all sales, including sales to consumers and sales between businesses.
25
In addition to the de facto FDA flavor ban that has
resulted from the denial of nearly all PMTAs for flavored ENDS, ENDS products that are non-tobacco flavored continue to face the threat
of prohibition at the local level, as many state and local authorities and attorneys general push for bans or request the FDA to deny
PMTAs for flavored ENDS. To date, at least nine states, including the District of Columbia, have banned the sale of flavored ENDS (e.g.,
California, Massachusetts, Illinois, New Jersey, New York, Rhode Island, and Utah), with several more considering similar bans (e.g.,
Maryland and Connecticut)
Our supply to our wholesalers and retailers
is dependent on the demands of their customers who are sensitive to increased sales taxes and economic conditions affecting their disposable
income.
Consumer purchases of tobacco products are historically
affected by economic conditions, such as changes in employment, salary and wage levels, the availability of consumer credit, inflation,
interest rates, fuel prices, sales taxes, and the level of consumer confidence in prevailing and future economic conditions. Discretionary
consumer purchases, such as the BIDI ® Stick, may decline during recessionary periods or at other times when disposable
income is lower, and taxes may be higher.
We may be subject to increasing international
control and regulation.
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;
●
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.
Our business may be damaged by events outside
of our own or Bidi’s control, such as the impact of epidemics, political changes, or natural disasters.
Our business could be adversely affected by the effects
of epidemics, political changes, wars or natural disasters. World economies and capital markets have been adversely impacted by COVID-19
and its variants, the Ukraine-Russia conflict, the recent eruption of hostilities in Israel and Gaza and political instability in the
United States and elsewhere. The lasting impacts of these matters on the United States and broader global economy, including supply chain
disruption, may have a significant continuing negative effect on our company and may continue to materially impact our company, our ability
to conduct business, our financial condition and results of operations.
26
Reliance on information technology means a significant
disruption could affect our communications and operations.
We increasingly rely on information technology systems
for our internal communications, controls, reporting and relations with customers and suppliers, and information technology is becoming
a significantly important tool for our sales staff. In addition, our reliance on information technology exposes us to cyber-security risks,
which could have a material adverse effect on our ability to compete. Security and privacy breaches may expose us to liability and cause
us to lose customers or may disrupt our relationships and ongoing transactions with other entities with whom we contract throughout our
network. The failure of our information systems to function as intended, or the penetration by outside parties’ intent on disrupting
business processes, could result in significant costs, loss of revenue, assets or personal or other sensitive data and reputational harm.
Security and privacy breaches may expose us
to liability and cause us to lose customers.
Federal and state laws require us to safeguard our
wholesalers’, retailers’, and consumers’ financial information, including credit information. Although we have established
security procedures to protect against identity theft and the theft of our customers’ financial information, our security and testing
measures may not prevent security breaches. We cannot guarantee that a future breach will not result in material liability or otherwise
harm to our business. In the event of any such breach, we may be required to notify governmental authorities or consumers under breach
disclosure laws, indemnify consumers, or other third parties for losses resulting from the breach, and expend resources investigating
and remediating any vulnerabilities that contributed to the occurrence of the breach. We rely on third-party technology to safeguard the
security of sensitive information in our possession. Advances in computer capabilities, new discoveries in the field of cryptography and
quantum computing, inadequate facility security or other developments may result in a compromise or breach of the technology used by us
to protect customer data. Any compromise of our security, even a security breach that does not result in a material liability could harm
our reputation and, therefore, our business and financial condition. In addition, a party who can circumvent our security measures or
exploit inadequacies in our security measures, could, among other effects, misappropriate proprietary information, cause interruptions
in our operations or expose customers and other entities with which we interact to computer viruses or other disruptions. Actual or perceived
vulnerabilities may lead to claims against us. Any insurance coverage that we obtain to cover such risks may be insufficient to cover
all claims or losses. To the extent the measures we have taken prove to be insufficient or inadequate, we may become subject to litigation
or administrative sanctions, which could result in significant fines, penalties or damages and harm to our reputation.
We may fail to manage our growth.
In our early years we had opportunities to grow significantly in a short
amount of time and we intended to continue that growth in the future. However, our future growth has been placed on hold with additional
constraints and demand for our resources, and we cannot be sure we will be able to manage an acceptable growth effectively as we did in
our early years. If we are unable to manage our growth while expanding the distribution of our products and increasing profit margins,
or if new systems that we implement to assist in managing our growth do not produce the expected benefits, our business, financial position,
results of operations and cash flows could be adversely affected. We may not be able to support, financially or otherwise, future growth,
or hire, train, motivate and manage the required personnel. Our failure to manage growth effectively could also limit our ability to achieve
our goals as they relate to streamlined sales, marketing and distribution operations and the ability to achieve certain financial metrics.
27
We are subject to fluctuations in our results
that make it difficult to track trends and develop strategies in the short term.
In response to competitor actions and pricing pressures,
we have engaged in significant use of promotional and sales incentives. We regularly review the results of our promotional spending activities
and adjust our promotional spending programs to maintain our competitive position as well as to confirm compliance with our adult-focused
marketing policies. Accordingly, unit sales volume and sales promotion costs in any period are not necessarily indicative of sales and
costs that may be realized in subsequent periods. Additionally, promotional activity significantly increases net sales in the month in
which it is initiated, and net sales are adversely impacted in the month after a promotion. Accordingly, based upon the timing of our
marketing and promotional initiatives, we have and may continue to experience significant variability in our results, which could affect
our ability to formulate strategies that allow us to maintain our market presence across volatile periods. If our fluctuations obscure
our ability to track important trends in our key markets, it may have a material adverse effect on our business, results of operations
and financial condition.
Adverse U.S. and global economic conditions
could negatively impact our business, prospects, results of operations, financial condition or cash flows.
Our business and operations are sensitive to global
economic conditions. These conditions include interest rates, energy costs, inflation, recession, fluctuations in debt and equity capital
markets, and the general condition of the United States and world economies, including as a result of the effect of the COVID-19 pandemic.
A material decline in the economic conditions affecting consumers, which cause a reduction in disposable income for the average consumer,
may change consumption patterns, and may result in a reduction in spending on our product offerings or a switch to cheaper products or
products obtained through illicit channels. As such, demand for our products may be particularly sensitive to economic conditions such
as inflation, recession, high energy costs, unemployment, changes in interest rates and money supply, changes in the political environment,
the ultimate effect on the economy of the COVID-19 pandemic and other factors beyond our control, any combination of which could result
in a material adverse effect on our business, results of operations, and financial condition.
The departure of key management personnel and
the failure to attract and retain talent could adversely affect our operations.
Our success depends upon the continued
contributions of our senior executive management, especially our Interim Chief Executive Officer, Mark Thoenes, our Interim Chief
Financial Officer, Eric Morris If one or more of our executive officers are unable or unwilling to continue in their current
positions, we may not be able to replace them readily, if at all. Additionally, we may incur additional expenses to recruit and
retain new executive officers. If any of our executive officers join a competitor or forms a competing company, we may lose some or
all of our customers. Finally, we do not maintain “key person” life insurance on any of our executive officers. Because
of these factors, the loss of the services of any of these key persons could adversely affect our business, financial condition, and
results of operations.
Our insurance may be insufficient to cover losses that may occur
as a result of our operations.
We currently maintain directors’ and officers’
liability insurance and property and general liability insurance. This insurance or other insurance we may elect to obtain may not be
or remain available to us or be obtainable by us at commercially reasonable rates, and the amount of our coverage may not be adequate
to cover any liability we incur. Future increases in insurance costs, coupled with the increase in deductibles, will result in higher
operating costs and increased risk. If we were to incur substantial liability and such damages were not covered by insurance or were in
excess of policy limits, or if we were to incur such liability at a time when we were not able to obtain liability insurance, our business,
results of operations and financial condition could be materially adversely affected.
28
Risks Related to Our Securities
Our Restated Certificate of Incorporation, as
amended (our “Certificate of Incorporation”), and our Bylaws (our “Bylaws”), as well as the DGCL and certain regulations,
could discourage or prohibit acquisition bids or merger proposals, which may adversely affect the market price of our Common Stock.
Provisions of our Certificate of Incorporation and
Bylaws and the DGCL may discourage, delay or prevent a merger, acquisition, or other change in control that stockholders may consider
favorable, including transactions in which our stockholders might otherwise receive a premium for their shares of our Common Stock. These
provisions may also prevent or frustrate attempts by our stockholders to replace or remove our management.
In addition, Section 203 of the DGCL prohibits a publicly-held
Delaware corporation from engaging in a business combination with an interested stockholder, which generally refers to a person which
together with its affiliates owns, or within the last three years has owned, 15 percent or more of our voting stock, for a period of three
years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved
in a prescribed manner.
The existence of the foregoing provisions and anti-takeover
measures could limit the price that investors might be willing to pay in the future for shares of Common Stock. They could also deter
potential acquirers of our company, thereby reducing the likelihood that our stockholders could receive a premium for their Common Stock
in an acquisition.
For so long as any shares of Series B Preferred
Stock remain outstanding, the majority holders of the Series B Preferred Stock are entitled to designate one individual to be nominated
to serve as a director on our board of directors.
For so long as any shares of Series B Preferred Stock
remain outstanding, the majority holders of the Series B Preferred Stock (or the Majority Holders) will be entitled to designate one (1)
individual to be nominated to serve as a director (who we refer to as the Series B Preferred Director) on our board of directors (or the
Board). At each annual meeting of the stockholders of our company, or at any special meeting called for the purpose of electing directors,
the Board shall nominate such designee for election. Unless the Board shall have received from the Majority Holders a written designation
by March 1 of each calendar year of an individual other than the then-sitting Series B Preferred Director, the Board shall nominate the
then-sitting Series B Preferred Director for re-election to the Board. The Series B Preferred Director is subject to any board of directors-related
provisions that may be contained in our Certificate of Incorporation or Bylaws. The Majority Holders, voting as a single class at a meeting
called for such purpose (or by written consent signed by the Majority Holders in lieu of such a meeting), have the sole right to remove
the Series B Preferred Director from the Board. Any vacancy created by the removal, resignation or death of a Series B Preferred Director
may solely be filled by the Majority Holders, voting as a single class, at a meeting called for such purpose (or by written consent signed
by the Majority Holders in lieu of such a meeting). The Series B Preferred Director shall be entitled to receive similar compensation,
benefits, reimbursement (including of reasonable travel expenses), indemnification and insurance coverage for his or her service as a
director of our company as the other non-employee directors of on the Board. As of the date of this Report, the seat on our Board designated
for the Series B Preferred Director is vacant due to Mr. Cassidy’s resignation from the Board on January 25, 2024. As a result of
their Board appointment right, the Majority Holders could have a disproportionate impact on our governance and operations, which could
have an adverse effect on our company.
The Series B Preferred Stock ranks senior to
our Common Stock.
The Series B Preferred Stock ranks, with respect to
dividend rights, rights on the distribution of assets on any voluntary or involuntary liquidation, dissolution or winding up of the affairs
of our company, and redemption rights, senior to the Common Stock and each other class or series of securities now existing or hereafter
authorized classified or reclassified, the terms of which do not expressly provide that such class or series ranks on a parity basis with
or senior to the Series B Preferred Stock as to dividend rights, rights on the distribution of assets on any voluntary or involuntary
liquidation, dissolution or winding up of the affairs of our company, and redemption rights.
29
Future offerings of debt or equity securities
may rank senior to our Common Stock.
We have a present need for additional capital, and
we will likely continue to seek to raise new funding from time to time through the issuance of debt or equity securities. Our Board of
Directors has the ability, without further approval of our stockholders, to issue debt or equity securities in the future, in addition
to the Series B Preferred Stock, ranking senior to our Common Stock or otherwise incur additional indebtedness, it is possible that these
securities or indebtedness will be governed by an indenture or other instrument containing covenants restricting our operating flexibility
and limiting our ability to pay dividends to stockholders. Additionally, any convertible or exchangeable securities that we issue in the
future may have rights, preferences, and privileges, including with respect to dividends, more favorable than those of our Common Stock
and may result in dilution (perhaps significant) to our stockholders. Because our decision to issue debt or equity securities in any future
offering or otherwise incur indebtedness will depend on market conditions and other factors beyond our control, we cannot predict or estimate
the amount, timing, or nature of our future offerings or financings, any of which could reduce the market price of our Common Stock and
dilute its value.
We may issue additional classes or series of
preferred stock whose terms could adversely affect the voting power or value of our commons stock.
Our Certificate of Incorporation authorizes us to
issue, without the approval of our stockholders, one or more classes or series of preferred stock having such designations, preferences,
limitations, and relative rights, including preferences over our Common Stock respecting dividends and distributions, as our Board may
determine. The terms of one or more additional classes or series of preferred stock could adversely impact the voting power or value of
our Common Stock. For example, we might grant holders of preferred stock the right to elect some number of our directors in all events
or on the happening of specified events or the right to veto specified transactions. Similarly, the repurchase or redemption rights or
dividend or liquidation preferences we might assign to holders of preferred stock could affect the residual value of our Common Stock.
The market price for our Common Stock is volatile
and has and will fluctuate.
The market price for shares of our Common Stock may
be volatile and subject to wide fluctuations in response to numerous factors, many of which are beyond our control, including the following:
(i) action by the FDA with respect to Bidi’s PMTAs or regulatory action by FDA generally against Bidi, our company or our industry,
(ii) actual or anticipated fluctuations in our quarterly financial results; (iii) recommendations by securities research analysts; (iv)
changes in the economic performance or market valuations of other issuers that investors deem comparable to ours; (v) addition or departure
of our executive officers or members of our Board and other key personnel; (vi) release or expiration of lock-up or other transfer restrictions
on outstanding shares of Common Stock; (vii) sales or perceived sales of additional shares of our Common Stock; (viii) the liquidity of
our Common Stock or lack thereof; (ix) significant acquisitions or business combinations, strategic partnerships, joint ventures, or capital
commitments by or involving us or our competitors; and (x) news reports relating to trends, concerns, technological or competitive developments,
regulatory changes, and other related issues in our industry or target markets. Financial markets often experience significant price and
volume fluctuations that affect the market prices of equity securities of public entities and that are, in many cases, unrelated to the
operating performance, underlying asset values or prospects of such entities. Accordingly, the market price of our shares of Common Stock
may decline even if our operating results, underlying asset values or prospects have not changed.
Our Common Stock is listed on the Nasdaq but
there can be no assurance that we will be able to comply with the continued listing standards of Nasdaq in the future, particularly since
we are presently experiencing a Nasdaq continuing listing deficiency.
Although our Common Stock is listed on Nasdaq, we
cannot assure you that we will be able to comply with the standards that we are required to meet in order to maintain a listing of our
Common Stock on Nasdaq in the future. Nasdaq listing rules require us to maintain certain closing bid price, stockholders’ equity,
and other financial metric criteria, as well as certain corporate governance requirements, for our Common Stock to continue trading on
Nasdaq. If we fail to comply with the continued listing standards, our Common Stock could be delisted.
30
We
have been subject to Nasdaq listing deficiency issues in the past.
There can be no assurances given that we will be able
to cure any listing deficiencies related to our company. A failure to maintain listing on Nasdaq could have a material adverse effect
on the liquidity and price of our Common Stock.
Future sales of shares of our Common Stock by
our controlling shareholders or by our officers and directors may negatively impact the market price for our Common Stock.
Subject to
compliance with applicable securities laws, our controlling shareholders
Kaival Holdings and Bidi Vapor as well as our directors and officers and their affiliates may sell some or all of their shares of
our Common Stock in the future. No prediction can be made as to the effect, if any, such future sales of shares of our Common Stock
may have on the market price of the shares of our Common Stock prevailing from time to time. However, the future sale of a
substantial number of shares of our Common Stock by our directors and officers and their affiliates, or the perception that such
sales could occur, could adversely affect prevailing market prices for our shares of our Common Stock.
The concentration of ownership by Kaival Holdings and Bidi Vapor and our officers
and directors may result in conflicts of interest and may prevent other stockholders from influencing significant corporate decisions
and depress our stock price.
Based
on the number of shares outstanding as
of as of the date of this Report, Kaival Holdings and Bidi Vapor, our affiliated majority stockholder, together with our officers and
directors, beneficially own a combined total of approximately 51.6% percent
of our outstanding Common Stock, including shares of our Common Stock subject to stock options that are currently exercisable or are exercisable
and that vest within 60 days as of the date of this prospects. If our controlling stockholders, together with these officers and directors
act together, they will be able to exert a significant degree of influence over our management and affairs and control matters requiring
stockholder approval, including the election of directors and approval of mergers, business combinations, or other significant transactions.
For example, Kaival Holdings, together with our officers and directors, could cause us to enter into transactions or agreements that we
would not otherwise consider or might not be in the best interests of our minority stockholders. Similarly, this concentration of ownership
may have the effect of delaying or preventing a change in control of our company otherwise favored by our other stockholders. This, in
turn, could have a negative effect on the market price of our Common Stock. It could also prevent our stockholders from realizing a premium
over the market price for their shares of our Common Stock. The concentration of ownership also may contribute to the low trading volume
and volatility of our Common Stock. Moreover, any such conflicts of interest may not be easy to resolve and could impair our ability to
operate our business.
Our Common Stock may become the target of a “short squeeze.”
Beginning in 2021, the securities of several companies
have increasingly experienced significant and extreme volatility in stock price due to short sellers of shares of Common Stock and buy-and-hold
decisions of longer investors, resulting in what is sometimes described as a “short squeeze.” Short squeezes have caused extreme
volatility in those companies and in the market and have led to the price per share of those companies trading at a significantly inflated
rate that is disconnected from the underlying value of the company. Sharp rises in a company’s stock price may force traders in
a short position to buy stock to avoid even greater losses. Many investors who have purchased shares in those companies at an inflated
rate face the risk of losing a significant portion of their original investment as the price per share has declined steadily as interest
in those stocks has abated. We may be a target of a short squeeze, and investors may lose a significant portion or all their investment
if they purchase our shares at a rate that is significantly disconnected from our underlying value.
31
If securities or industry analysts fail to continue
publishing research about our business, if they change their recommendations adversely or if our results of operations do not meet their
expectations, our stock price and trading volume could decline.
The trading market for our Common Stock will be influenced
by the research and reports that industry or securities analysts publish about us or our business. If one or more of these analysts cease
coverage of our company or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could
cause our stock price or trading volume to decline. In addition, it is likely that in some future period our operating results will be
below the expectations of securities analysts or investors. If one or more of the analysts who cover us downgrade our Common Stock, or
if our results of operations do not meet their expectations, our stock price could decline.
We do not currently pay dividends on our shares
of Common Stock and have no intention of paying dividends on shares of our Common Stock for the foreseeable future.
No dividends on the shares of our Common Stock have
been paid by us to date. We do not intend to declare or pay any cash dividends in the foreseeable future. Payment of any future dividends
will be at the discretion of our Board, after considering a multitude of factors appropriate in the circumstances, including our operating
results, financial condition, and current and anticipated cash needs. In addition, the terms of any future debt or credit facility may
preclude us from paying any dividends unless certain consents are obtained, and certain conditions are met. There is no assurance that
future dividends will be paid, and, if dividends are paid, there is no assurance with respect to the amount of any such dividend. Unless
our Board decides to pay dividends, our stockholders will be required to look at appreciation of our Common Stock to realize a gain on
their investment. There can be no assurance that this appreciation will occur.
For as long as we are an “emerging growth
company” we intend to take advantage of reduced disclosure and governance requirements applicable to emerging growth companies,
which could result in our Common Stock being less attractive to investors and could make it more difficult for us to raise capital as
and when we need it.
We are an “emerging growth company,” as
defined in the JOBS Act, and we have taken advantage, and intend to continue to take advantage, of certain exemptions from various reporting
requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being
required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”),
reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the
requirements of holding a non-binding advisory vote on executive compensation and stockholder approval of any golden parachute payments
not previously approved.
Investors may find our Common Stock less attractive
because we rely on these exemptions, which could contribute to a less active trading market for our Common Stock or volatility in our
share price. In addition, we may be less attractive to investors, and it may be difficult for us to raise additional capital when we need
it. Investors may be unable to compare our business with other companies in our industry if they believe that our financial accounting
is not as transparent as other companies in our industry. If we are unable to raise additional capital as and when we need it, our financial
condition and results of operations may be materially and adversely affected.
We may take advantage of these reporting exemptions
until we are no longer an emerging growth company.
32
We have identified material weaknesses in our
system of internal controls over financial reporting and, if we cannot remediate these material weaknesses, we may not be able to accurately
report our financial condition, results of operations, or cash flows, which may adversely affect investor confidence in us and, as a result,
the value of our Common Stock.
A material weakness is a deficiency, or combination
of deficiencies, in internal control over financial reporting that results in more than a reasonable possibility that a material misstatement
of annual or interim financial statements will not be prevented or detected on a timely basis. Section 404 of Sarbanes-Oxley also generally
requires an attestation from our independent registered public accounting firm on the effectiveness of our system of internal controls
over financial reporting. However, if we remain an emerging growth company as defined in the JOBS Act, we intend to take advantage of
the exemption permitting us not to comply with the independent registered public accounting firm attestation requirement.
Our management has identified, and we have disclosed,
certain material weaknesses in our system of internal controls over financial reporting as of our fiscal year ended October 31, 2024.
Specifically, our management has found that our internal control system over financial reporting was ineffective as of October 31, 2024,
based on a determination that there was a lack of sufficient resources to provide adequate segregation of duties consistent with control
objectives, the lack of sufficient and consistent real time remote communications, and the lack of a fully developed formal review process
that includes multiple levels of review over financial disclosure and reporting processes.
To address these material weaknesses, and subject
to the receipt of additional financing or cash flows, we have undertaken, and intend to continue to undertake, remediation measures to
address such material weaknesses, including implementing prevent and detect internal control procedures pursuant to which we can ensure
segregation of duties and hire additional resources to ensure appropriate review and oversight.
Our compliance with Section 404 of Sarbanes-Oxley
will require that we incur substantial accounting expenses and spend significant management efforts. We may not be able to complete our
evaluation, testing, and any required remediation in a timely fashion. During the evaluation and testing process, if we identify one or
more material weaknesses in our internal control over financial reporting, we will be unable to assert that our system of internal control
over financial reporting is effective. We cannot assure you that there will not be material weaknesses or significant deficiencies in
our internal control over financial reporting in the future. Any failure to maintain internal control over financial reporting could severely
inhibit our ability to accurately report our financial condition, results of operations, or cash flows. This may expose us, including
individual executives, to potential liability which could significantly affect our business.
We cannot assure you that we will, in the future,
identify areas requiring improvement in our system of internal controls over financial reporting. We cannot assure you that the measures
we will take to remediate any areas in need of improvement will be successful or that we will implement and maintain adequate controls
over our financial process and reporting in the future as we continue to grow. If we are unable to establish appropriate internal financial
reporting controls and procedures, if we are unable to conclude that our system of internal controls over financial reporting is effective,
or if our independent registered public accounting firm determines we have a material weakness or significant deficiency in our system
of internal controls over financial reporting once that firm begins its audits of our systems of internal controls over financial reporting,
it could cause us to fail to meet our reporting obligations, result in the restatement of our financial statements, harm our operating
results, cause investors to lose confidence in the accuracy and completeness of our financial reports, the market price of our common
shares could decline, and we could be subject to sanctions or investigations by Nasdaq, the SEC, or other regulatory authorities. Failure
to remedy any material weakness in our system of internal controls over financial reporting, or to implement or maintain other effective
internal control systems required of public companies, could also restrict our future access to the capital markets.
Our disclosure controls and procedures may not
prevent or detect all errors or acts of fraud.
Our disclosure controls and procedures are designed
to reasonably assure that information required to be disclosed by us in reports we file or submit under the Exchange Act is accumulated
and communicated to management, recorded, processed, summarized, and reported within the time periods specified in the rules and forms
of the SEC. We believe that any disclosure controls and procedures or internal controls and procedures, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. As of October 31, 2024,
our Interim Chief Executive Officer and our Interim Chief Financial Officer concluded that the disclosure controls and procedures were
not effective as of such date due to material weaknesses in internal controls identified above.
33
These inherent limitations include the realities that
judgments in decision-making can be faulty, and that breakdowns can occur because of simple errors or mistakes. Additionally, controls
can be circumvented by the individual acts of some persons, by collusion of two or more people or by an unauthorized override of the controls.
Accordingly, because of the inherent limitations in our internal controls system, misstatements, or insufficient disclosures due to error
or fraud may occur and not be detected.
We have incurred, and will continue to incur,
increased costs as a result of operating as a public company, and our management has been required, and will continue to be required,
to devote substantial time to new compliance initiatives.
As a public company, we have incurred and are continuing
to incur significant legal, accounting, and other expenses and these expenses may increase even more after we are no longer an “emerging
growth company” and “smaller reporting company.” We are subject to the reporting requirements of the Exchange Act and
the rules adopted, and to be adopted, by the SEC. Our management and other personnel devote a substantial amount of time to these compliance
initiatives.
Moreover, these rules and regulations have substantially
increased our legal and financial compliance costs and made some activities more time-consuming and costly. The increased costs can result
in our reporting a net loss. These rules and regulations may make it more difficult and more expensive for us to maintain sufficient directors’
and officers’ liability insurance coverage. We cannot predict or estimate the amount or timing of additional costs we may continue
to incur to respond to these requirements. The ongoing impact of these requirements could also make it more difficult for us to attract
and retain qualified people to serve on our Board, our Board committees, or as executive officers.