Exhibit 10.14
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 2020
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ____________
Commission file number 000-56016
KAIVAL BRANDS INNOVATIONS GROUP, INC.
(Exact name of registrant as specified in its charter)
| DELAWARE | 83-3492907 | |
| (State
or other jurisdiction of incorporation or organization) |
(I.R.S.
Employer Identification No.) |
4460 Old Dixie Highway
Grant, Florida 32949
(Address of principal executive offices, including zip code)
(833) 452-4825
(Registrant’s telephone number, including area code)
N/A
(Former name, former address, and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| None | None | None |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ☒ NO ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit such files). YES ☒ NO ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large Accelerated filer | ☐ | Accelerated filer | ☐ |
| Non-accelerated filer | ☒ | Smaller reporting company | ☒ |
| Emerging growth company | ☒ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ☐ NO ☒
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
277,282,630 shares of common stock, $0.001 par value, outstanding as of September 14, 2020
KAIVAL BRANDS INNOVATIONS GROUP, INC.
FORM 10-Q
TABLE OF CONTENTS
i
CAUTIONARY NOTE CONCERNING FORWARD-LOOKING STATEMENTS
Certain statements and information in this Quarterly Report on Form 10-Q for the quarter ended July 31, 2020 (the “Quarterly Report”) may constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical facts, which address activities, events, or developments that we expect or anticipate will or may occur in the future, including such things as future capital expenditures, commencement of business operations, business strategy, statements related to the expected effects on our business from the novel coronavirus (“COVID-19”) pandemic, and other similar matters are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” or “continue,” or other comparable terminology. These forward-looking statements are based largely on our current expectations and assumptions and are subject to a number of risks and uncertainties, many of which are beyond our control. These statements are subject to many risks, uncertainties, and other important factors that could cause actual future results to differ materially from those expressed in the forward-looking statements including, but not limited to, the duration and scope of the COVID-19 pandemic and impact on the demand for the products we distribute; our ability to obtain the products from the manufacturer; actions governments, businesses, and individuals take in response to the pandemic, including mandatory business closures and restrictions on onsite commercial interactions; the impact of the COVID-19 pandemic and action taken in response to the pandemic on global and regional economies and economic activity; the pace of recovery when the COVID-19 pandemic subsides; general economic uncertainty in key global markets and a worsening of global economic conditions or low levels of economic growth; our inability to sustain profitable sales growth; and circumstances or developments that may make us unable to implement or realize the anticipated benefits, or that may increase the costs, of our current and planned business initiatives. In light of these risks and uncertainties, all of the forward-looking statements made herein are qualified by these cautionary statements and there can be no assurance that the actual results or developments anticipated by us will be realized. We undertake no obligation to update or revise any of the forward-looking statements contained herein.
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Kaival Brands Innovations Group, Inc.
Balance Sheets
(Unaudited)
July 31, | October 31, 2019 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash in bank | $ | 2,669,450 | $ | — | ||||
| Accounts receivable | 7,033,361 | — | ||||||
| Accounts receivable – related parties | 19,910 | — | ||||||
| Inventories | 9,357 | — | ||||||
| Total Current Assets | 9,732,078 | — | ||||||
| TOTAL ASSETS | $ | 9,732,078 | $ | — | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Accounts payable and accrued expenses | $ | 27,811 | $ | 44,886 | ||||
| Accrued taxes | 1,396,919 | — | ||||||
| Accounts payable – related party | 4,283,852 | — | ||||||
| Total Current Liabilities | 5,708,582 | 44,886 | ||||||
| TOTAL LIABILITIES | $ | 5,708,582 | $ | 44,886 | ||||
| STOCKHOLDERS’ EQUITY(DEFICIT): | ||||||||
| Preferred stock 5,000,000 shares authorized; Series A preferred stock ($.001 par value, 3,000,000 shares authorized, none issued and outstanding as of July 31, 2020 and October 31, 2019) | — | — | ||||||
| Common stock ($.001 par value, 1,000,000,000 shares authorized, 576,495,148 and 572,364,574 issued and outstanding as of July 31, 2020 and October 31, 2019, respectively) | 576,496 | 572,365 | ||||||
| Additional paid-in capital | (200,844 | ) | (544,026 | ) | ||||
| Retained earnings (accumulated deficit) | 3,647,844 | (73,225 | ) | |||||
| Total Stockholders’ Equity (Deficit) | 4,023,496 | (44,886 | ) | |||||
| TOTAL LIABILITIES & STOCKHOLDERS’ EQUITY (DEFICIT) | $ | 9,732,078 | $ | — | ||||
The accompanying notes are an integral part of these unaudited financial statements.
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Kaival Brands Innovations Group, Inc.
Statements of Operations
(Unaudited)
For the Three Months Ended July 31, | For the Nine Months Ended July 31, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Revenues | ||||||||||||||||
| Revenues | $ | 32,422,993 | $ | — | $ | 54,923,896 | $ | — | ||||||||
| Revenues - related parties | 54,040 | — | 86,520 | — | ||||||||||||
| Excise tax on products | (101,724 | ) | — | (128,953 | ) | — | ||||||||||
| Total net revenues | 32,375,309 | — | 54,881,463 | — | ||||||||||||
| Cost of revenue | ||||||||||||||||
| Cost of revenue - related party | 27,860,145 | — | 47,771,211 | — | ||||||||||||
| Cost of revenue – other | 115,868 | 173,448 | ||||||||||||||
| Total cost of revenue | 27,976,013 | — | 47,944,659 | — | ||||||||||||
| Gross profit | 4,399,296 | — | 6,936,804 | — | ||||||||||||
| Operating expenses | ||||||||||||||||
| Commissions | 769,134 | — | 1,029,132 | — | ||||||||||||
| General & Administrative expenses | 704,737 | 27,135 | 915,762 | 45,320 | ||||||||||||
| Total operating expenses | 1,473,871 | 27,135 | 1,944,844 | 45,320 | ||||||||||||
| Income (loss) before income taxes provision | 2,925,425 | (27,135 | ) | 4,991,910 | (45,320 | ) | ||||||||||
| Provision for income taxes | (320,410 | ) | — | (1,270,841 | ) | — | ||||||||||
| Net income (loss) | $ | 2,605,015 | $ | (27,135 | ) | $ | 3,721,069 | $ | (45,320 | ) | ||||||
| Net income (loss) per common share - basic and diluted | $ | 0.00 | $ | (0.00 | ) | $ | 0.01 | $ | (0.00 | ) | ||||||
| Weighted average number of common shares outstanding - basic and diluted | 575,746,039 | 572,364,574 | 573,499,956 | 572,364,574 | ||||||||||||
The accompanying notes are an integral part of these unaudited financial statements.
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Kaival Brands Innovations Group, Inc.
Statements of Cash Flows
(Unaudited)
For the Nine Months Ended July 31, 2020 | For the Nine Months Ended July 31, 2019 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net income (loss) | $ | 3,721,069 | $ | (45,320 | ) | |||
| Adjustment to reconcile net income (loss) to net cash provided by operating activities: | ||||||||
| Stock based compensation | 320,156 | — | ||||||
| Expenses contributed to capital | 27,157 | 17,670 | ||||||
| Changes in current assets and liabilities: | ||||||||
| Accounts receivable | (7,033,361 | ) | — | |||||
| Accounts receivable – related parties | (19,910 | ) | — | |||||
| Inventories | (9,357 | ) | — | |||||
| Accounts payable – related party | 4,283,852 | — | ||||||
| Accrued taxes | 1,396,919 | |||||||
| Accounts payable and accrued expenses | (17,075 | ) | 27,650 | |||||
| Net cash provided by operating activities | 2,669,450 | — | ||||||
| Net change in cash | $ | 2,669,450 | $ | — | ||||
| Beginning cash balance | — | — | ||||||
| Ending cash balance | $ | 2,669,450 | $ | — | ||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||
| Interest paid | $ | — | $ | — | ||||
| Income taxes paid | $ | — | $ | — | ||||
The accompanying notes are an integral part of these unaudited financial statements.
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Kaival Brands Innovations Group, Inc.
Statement of Changes in Stockholders’ Equity (Deficit)
For the Three and Nine Months Ended July 31, 2020
(Unaudited)
Preferred Shares (Series A) | Preferred Shares (Series B) | Par Value Preferred Shares (Series A) | Par Value Preferred Shares (Series B) | Common Shares | Par Value Common Shares | Additional Paid-in Capital | Retained Earnings (Accumulated Deficit) | Total | ||||||||||||||||||||||||||||
| Balances, October 31, 2019 | — | — | $ | — | $ | — | 572,364,574 | $ | 572,365 | $ | (544,026 | ) | $ | (73,225 | ) | $ | (44,886 | ) | ||||||||||||||||||
| Expenses paid on behalf of the Company and contributed to capital | — | — | — | — | — | — | 26,457 | — | 26,457 | |||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | — | — | (12,933 | ) | (12,933 | ) | |||||||||||||||||||||||||
| Balances, January 31, 2020 | — | — | $ | — | $ | — | 572,364,574 | $ | 572,365 | $ | (517,569 | ) | $ | (86,158 | ) | $ | (31,362 | ) | ||||||||||||||||||
| Expenses paid on behalf of the Company and contributed to capital | — | — | — | — | — | — | 700 | — | 700 | |||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | — | 1,128,987 | 1,128,987 | |||||||||||||||||||||||||||
| Balances, April 30, 2020 | — | — | $ | — | $ | — | 572,364,574 | $ | 572,365 | $ | (516,869 | ) | $ | 1,042,829 | $ | 1,098,325 | ||||||||||||||||||||
| Issuance of common shares for compensation | — | — | — | — | 4,130,574 | 4,131 | 316,025 | — | 320,156 | |||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | — | 2,605,015 | 2,605,015 | |||||||||||||||||||||||||||
| Balances, July 31, 2020 | — | — | $ | — | $ | — | 576,495,148 | $ | 576,496 | $ | (200,844 | ) | $ | 3,647,844 | $ | 4,023,496 | ||||||||||||||||||||
The accompanying notes are an integral part of these unaudited financial statements.
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Kaival Brands Innovations Group, Inc.
Statement of Changes in Stockholders’ Deficit
For the Three and Nine Months Ended July 31, 2019
(Unaudited)
Preferred Shares (Series A) | Preferred Shares (Series B) | Par Value Preferred Shares (Series A) | Par Value Preferred Shares (Series B) | Common Shares | Par Value Common Shares | Additional Paid-in Capital | Accumulated Deficit | Total | ||||||||||||||||||||||||||||||||||||||||||||
| Balances, October 31, 2018 | — | — | $ | — | $ | — | 572,364,574 | $ | 572,365 | $ | (570,989 | ) | $ | (4,376 | ) | $ | (3,000 | ) | ||||||||||||||||||||||||||||||||||
| Expenses paid on behalf of the Company and contributed to capital | — | — | — | — | — | — | 7,210 | — | 7,210 | |||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | — | — | (13,960 | ) | (13,960 | ) | |||||||||||||||||||||||||||||||||||||||||
| Balances, January 31, 2019 | — | — | $ | — | $ | — | 572,364,574 | $ | 572,365 | (563,779 | ) | $ | (18,336 | ) | $ | (9,750 | ) | |||||||||||||||||||||||||||||||||||
| Expenses paid on behalf of the Company and contributed to capital | — | — | — | — | — | — | 4,950 | — | 4,950 | |||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | — | — | (4,225 | ) | (4,225 | ) | |||||||||||||||||||||||||||||||||||||||||
| Balances, April 30, 2019 | — | — | $ | — | $ | — | 572,364,574 | $ | 572,365 | $ | (558,529 | ) | $ | (22,561 | ) | $ | (9,025 | ) | ||||||||||||||||||||||||||||||||||
| Expenses paid on behalf of the Company and contributed to capital | — | — | — | — | — | — | 5,510 | — | 5,510 | |||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | — | — | (27,135 | ) | (27,135 | ) | |||||||||||||||||||||||||||||||||||||||||
| Balances, July 31, 2019 | — | — | $ | — | $ | — | 572,364,574 | $ | 572,365 | $ | (553,319 | ) | $ | (49,696 | ) | $ | (30,650 | ) | ||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited financial statements.
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KAIVAL BRANDS INNOVATIONS GROUP, INC.
Notes to Unaudited Financial Statements
Note 1 – Organization and Description of Business
Kaival Brands Innovations Group, Inc. (the “Company,” the “Registrant,” “we,” “us,” or “our”), formerly known as Quick Start Holdings, Inc., was incorporated on September 4, 2018 in the State of Delaware.
USSE Corp. and USSE Delaware Merger
USSE Corp., a Nevada Corporation (“USSE Nevada”), formerly known as Quick Start Holdings, Inc., was incorporated with the Nevada Secretary of State on July 8, 1998 under the original name C&A Restaurants, Inc. (“C&A Restaurants”). On June 15, 2009, C&A Restaurants changed its name to USSE Corp.
Effective September 19, 2018, USSE Nevada re-domiciled from Nevada to Delaware pursuant to a merger of USSE Nevada with and into USSE Delaware, Inc., a Delaware corporation (“USSE Delaware”), with USSE Delaware as the surviving entity (the “Re-domestication Merger”). Each share of USSE Nevada’s common stock issued and outstanding immediately prior to the effective date of the Re-domestication Merger was automatically converted into one fully paid and nonassessable share of USSE Delaware.
Immediately following the Re-domestication Merger, USSE Delaware was authorized to issue up to 1,005,000,000 shares, which consisted of: (i) 1,000,000,000 shares of common stock, par value $0.001 per share, of which 66,397,574 shares were issued and outstanding at such date; (ii) 5,000,000 shares of preferred stock, par value $0.001 per share, of which (a) 1,000,000 shares were designated as Convertible Series A, all of which were issued and outstanding at that date; and (b) 500,000 shares were designated as Convertible Series B, of which 71,700 Convertible Series B preferred shares were issued and outstanding at that date.
Holding Company Reorganization
On September 4, 2018, USSE Delaware acquired 1,000 shares of common stock of the Company, which represented 100% of the Company’s then-outstanding shares of common stock, for no consideration, resulting in the Company becoming a wholly-owned subsidiary of USSE Delaware. Also, immediately prior to the Holding Company Reorganization (as defined below), USSE Merger Sub, Inc., a Delaware corporation (“USSE Merger Sub”), was the Company’s wholly-owned subsidiary.
On September 19, 2018 (the “Effective Time”), and in accordance with the provisions set forth in Section 251(g) of the Delaware General Corporation Law (“DGCL”), USSE Merger Sub, an indirect wholly-owned subsidiary of USSE Delaware and the Company’s direct wholly-owned subsidiary merged with and into USSE Delaware, the Company’s then parent (the “Holding Company Reorganization”). USSE Delaware was the surviving corporation and the Company’s 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 the Company’s 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 the Company’s preferred stock, having the same designations, rights, powers, and preferences, and the qualifications, limitations, and restrictions thereof, as the corresponding share of USSE Delaware’s preferred stock. Each share of the Company’s common stock issued and outstanding and held by USSE Delaware immediately prior to the Effective Time was cancelled.
This resulted in the Company being authorized to issue up to 1,005,000,000 shares, which consisted of: (i) 1,000,000,000 shares of common stock, par value $0.001 per share, of which 66,397,574 shares were issued and outstanding; (ii) 5,000,000 shares of preferred stock, par value $0.001 per share, of which (a) 1,000,000 shares were designated as Convertible Series A, all of which were issued and outstanding; and (b) 500,000 shares were designated as Convertible Series B, of which 71,700 shares of Convertible Series B preferred stock were issued and outstanding.
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Post-Holding Company Reorganization
On October 19, 2018, the Company 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 (“GRMZ”), for services rendered to the Company.
Commensurate with the filing of the Company’s Amended and Restated Certificate of Incorporation with the Delaware Secretary of State on October 22, 2018, every issued and outstanding share of Convertible Series A preferred stock was converted into 1.25 shares of common stock with shareholders’ economic rights preserved. Additionally, at the same time, every share of Convertible Series B preferred stock, issued and outstanding was converted into ten shares of common stock with stockholders’ economic rights adversely affected in the conversion. Immediately following the conversion of the aforementioned shares, and upon filing of the Amended and Restated Certificate of Incorporation, the authorized and unissued shares of Convertible Series A and Convertible Series B preferred stock were cancelled. As of October 22, 2018, Convertible Series A and Series B preferred stock were removed from the status of authorized but unissued preferred stock.
On February 6, 2019, the Company entered into a non-binding Share Purchase Agreement (the “Agreement”), by and among the Company, GMRZ, and Kaival Holdings, LLC (formerly known as Kaival Brands Innovations Group, LLC), a Delaware limited liability company (formerly known as Kaival Brands Innovations Group, LLC) (“KH”), pursuant to which, on February 20, 2019, GMRZ sold 504,000,000 shares of the Company’s restricted common stock, representing approximately 88.06 percent of the Company’s issued and outstanding shares of common stock, to KH, and KH 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 the Company, with KH becoming the Company’s largest controlling stockholder. The sole voting members of KH are Nirajkumar Patel and Eric Mosser. The Purchase Price was paid with personal funds of the members of KH.
Effective July 12, 2019, we changed our corporate name from Quick Start Holdings, Inc. to Kaival Brands Innovations Group, Inc. The name change was effected 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.
On the effective date of the merger, our name was changed to “Kaival Brands Innovations Group, Inc.” and our Amended and Restated Certificate of Incorporation, as amended (the “Charter”), was further amended to reflect our new legal name. There were no other changes to our Charter.
Share Cancellation and Exchange Agreement
On August 19, 2020, the Company entered into a Share Cancellation and Exchange Agreement (the “Share Cancellation and Exchange Agreement”) with its controlling stockholder, KH.
Pursuant to the Share Cancellation and Exchange Agreement, KH returned to the Company 300,000,000 shares of the Company’s common stock (the “Cancellation Shares”), which Cancellation Shares were cancelled and retired by the Company. Following such cancellation, KH owns 204,000,000 shares of the Company’s common stock.
On August 19, 2020, the Company 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 ”). All series of preferred stock, whether now or hereafter designated, may by their respective terms have a preference over the Series A Preferred Stock in respect of distribution upon liquidation, dividends, or any other right or matter. The number of shares so designated is three million (3,000,000) shares, par value $0.001 per share, and such amount cannot be increased except by the favorable vote or the written consent of the holders of at least a majority of the issued and outstanding shares of Series A Preferred Stock or by a resolution of the Board of Directors. Such number of shares of Series A Preferred Stock may be decreased by the written consent of the holders of at least a majority of the issued and outstanding shares of Series A Preferred Stock or by a resolution of the Board of Directors; provided, however, that no decrease shall reduce the number of shares of Series A Preferred Stock to a number less than the number of the shares then outstanding plus the number of shares issuable upon exercise of outstanding rights, options, or warrants or upon conversion of outstanding securities issued by the Company. The holders of the Series A Preferred Stock do not have any preferential dividend rights and shall be entitled to receive dividends, if any, only if, when, and as declared by the Board of Directors in its sole and absolute discretion. The holders of the Series A Preferred Stock have no voting rights. At any time on or after November 1, 2023, each share of Series A Preferred Stock is convertible, at the option of the holder thereof. Notwithstanding the foregoing, the holders of Series A Preferred Stock will be entitled to convert their shares of Series A Preferred Stock prior to November 1, 2023 if any of the following events occur: (i) a Change of Control (as defined in the Certificate of Designation) or (ii) any other event as determined and agreed to by the Company and by the holders holding a majority of the issued and outstanding shares of Series A Preferred Stock. Each share of the Series A Preferred Stock is convertible into one hundred shares of common stock, par value $0.001 per share.
In exchange for the Cancellation Shares the Company issued 3,000,000 shares (the “Preferred Shares”) of its newly designated Series A Preferred Stock to KH. 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 of 1933, as amended (the “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 the Company, as issuer, with an existing stockholder, and no commission or other remuneration was paid or given directly for the exchange.
As of the date of this Quarterly Report on Form 10-Q, the Company has 277,282,630 shares of common stock issued and outstanding and 3,000,000 shares of Series A Preferred Stock issued and outstanding.
Description of Business
The Company is focused on growing and incubating innovative and profitable products into mature, dominant brands. In March 2020, the Company commenced business operations as a result of becoming the exclusive distributor of certain electronic nicotine delivery systems and related components (the “Products”) manufactured by Bidi Vapor, LLC (“Bidi”), a Florida limited liability company, and a related party company that is also owned by Nirajkumar Patel, the Chief Executive Officer and Chief Financial Officer of the Company.
On March 9, 2020, the Company entered into an exclusive distribution agreement (the “Distribution Agreement”) with Bidi, a related party company, which Distribution Agreement was amended and restated on May 21, 2020 (the “A&R Distribution Agreement”). Pursuant to the A&R Distribution Agreement, Bidi granted the Company an exclusive worldwide right to distribute the Products for sale and resale to both retail level customers and non-retail level customers. Currently, the Products consist primarily of the “Bidi Stick.”
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In connection with the A&R Distribution Agreement, the Company entered into non-exclusive sub-distribution agreements, which were subsequently amended and restated by the parties in order to clarify certain provisions (all such agreements, as amended and restated, are collectively referred to as the “A&R Sub-Distribution Agreements”), whereby the Company appointed the counterparties as non-exclusive sub-distributors. Pursuant to the A&R Sub-Distribution Agreements, the sub-distributors agreed to purchase for resale the Products in such quantities as they should need to properly service non-retail customers within the continental United States (the “Territory”).
On March 31, 2020, the Company entered into a service agreement (the “Service Agreement”) with QuikfillRx LLC, a Florida limited liability company (“QuikfillRx”), whereby QuikfillRx has agreed to provide the Company with certain services and support relating to sales management, website development and design, graphics, content, public communication, social media, management and analytics, and market and other research (collectively, the “Services”). The Services will be provided by QuikfillRx as requested from time to time by the Company.
On June 2, 2020, the Company entered into the First Amendment to the Service Agreement (the “First Amendment” and, collectively with the Service Agreement, the “Amended Service Agreement”) with QuikfillRx.
Pursuant to the terms of the First Amendment, the parties modified the amount of General Compensation (as defined below) to be paid to QuikfillRx. “General Compensation” consists of the following: (i) for the Services provided in March 2020, the Company paid QuikfillRx an amount equal to $86,000; (ii) for the Services provided in April 2020, the Company paid QuikfillRx an amount equal to $100,000; (iii) each calendar month commencing May 2020 through October 2020, the Company will pay QuikfillRx an amount equal to $125,000 per month for the Services to be performed during such calendar month; (iv) if the parties agree to extend the term of the Amended Service Agreement beyond the original expiration date of October 31, 2020, then for the period between November 1, 2020 and October 31, 2021, the Company will pay QuikfillRx $125,000 per month for the Services to be performed during such calendar month; and (iv) if the parties agree to extend the term of the Amended Service Agreement beyond October 31, 2021, then for the period between November 1, 2021 and October 31, 2022, the Company will pay QuikfillRx $150,000 per month for the Services to be performed during such calendar month.
COVID-19
In January 2020, the World Health Organization (the “WHO”) announced a global health emergency because of COVID-19, which originated in Wuhan, China and the risks to the international community as the virus spread globally beyond its point of origin. In March 2020, the WHO classified the COVID-19 outbreak as a pandemic based on the rapid increase in global exposure.
As of the date of issuance of these unaudited financial statements, our operations have not been significantly impacted. No impairments were recorded as of July 31, 2020 and no triggering events or changes in circumstances had occurred. However, the full impact of the COVID-19 pandemic continues to evolve subsequent to the three and nine months ended July 31, 2020 and as of the date these unaudited financial statements are issued. As such, the full magnitude of the COVID-19 pandemic, and the resulting impact, if any, on our financial condition, liquidity, and future results of operations is uncertain. Management is actively monitoring the global situation on our financial condition, liquidity, operations, suppliers, industry, and customers. Reduced demand for products or impaired ability to meet customer demand (including as a result of disruptions at our suppliers) could have a material adverse effect on our business operations and financial performance. Given the daily evolution of the COVID-19 pandemic and the global responses to curb its spread, we are not presently able to estimate the effects of the COVID-19 pandemic on our results of operations, financial condition, or liquidity for the remainder of fiscal year 2020 and beyond. As of the date of this filing, our recently commenced business operations have not been impacted.
Note 2 – Basis of Presentation and Significant Accounting Policies
Basis of Presentation
The accompanying unaudited interim financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and the rules of the Securities and Exchange Commission (the “SEC”) and should be read in conjunction with the audited financial statements and notes thereto for the year ended October 31, 2019, as reported in the Company’s Annual Report on Form 10-K filed with the SEC. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim period presented have been reflected herein. The results of operations for the interim period are not necessarily indicative of the results to be expected for the full year. Notes to the financial statements, which would substantially duplicate the disclosures contained in the audited financial statements for the year ended October 31, 2019, as reported in the Annual Report on Form 10-K filed with the SEC on January 27, 2020, have been omitted.
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Significant Accounting Policies
Accounts Receivable and Allowance for Doubtful Accounts
Receivables are stated at cost, net of an allowance for doubtful accounts. The Company establishes an allowance for doubtful accounts based on management’s assessment of the collectability of accounts receivables. A considerable amount of judgment is required in assessing the amount of the allowance and the Company considers the historical level of credit losses and collection history and applies percentages to aged receivable categories. The Company makes judgments about the creditworthiness of debtors based on ongoing credit evaluations, and monitors current economic trends that might impact the level of credit losses in the future. If the financial condition of the debtors were to deteriorate, resulting in their inability to make payments, a larger allowance may be required. As of July 31, 2020, the Company did not have any allowance for doubtful accounts based on management’s assessment.
Inventories
Inventories are stated at the lower of cost and net realizable value. Cost includes all costs of purchase and other costs incurred in bringing the inventories to their present location and condition. Net realizable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. As of July 31, 2020, the inventories only consisted of finished goods.
Reclassifications
Reclassifications have been made to conform with current period presentation.
Revenue Recognition
The Company adopted ASC 606, Revenue from Contracts with Customers (Topic 606), in the second quarter of fiscal year 2020, as this was the first quarter that the Company generated revenues. Under ASC 606, the Company recognizes revenue when a customer obtains control of promised goods, in an amount that reflects the consideration that the Company expects to receive in exchange for the goods. To determine revenue recognition for arrangements within the scope of ASC 606, the Company performs the following five steps: (1) identify the contracts with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when or as the entity satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods it transfers to the customer. The Company excludes from the transaction price sales taxes, excise taxes and value added taxes imported at the time of the sales. These taxes are not billed to customers by the Company. We use the term net revenues to refer to our operating revenues from the sale of our products, including shipping and handling charges billed to customers, net of sales and promotion incentives, and excise taxes.
Products Revenue
The Company generates products revenue from the sale of the Products (as defined above) to retail and non-retail customers. The Company recognizes revenue at a point in time based on management’s evaluation of when performance obligations under the terms of a contract with the customer are satisfied and control of the Products has been transferred to the customer. In most situations, transfer of control is considered complete when the products have been shipped to the customer. The Company’s sales arrangements for retail sales usually require full prepayment before delivery of the Products. The advance payment is not considered a significant financing component because the period between when the Company transfers a promised good to a customer and when the customer pays for that good is short. The Company offers credit sales arrangements to non-retail (or wholesale) customers and monitors the collectability of each credit sale periodically. There have not been significant credits or returns and as such no reserve for sales returns and allowances has been deemed necessary.
Income Tax
Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred taxes related primarily to differences between the recorded book basis and the tax basis of assets and liabilities for financial and income tax reporting. Deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Deferred taxes are also recognized for operating losses that are available to offset future taxable income and tax credits that are available to offset future federal income taxes. The Company believes that its income tax filing positions and deductions will be sustained on audit and does not anticipate any adjustments that will result in a material adverse effect on the Company’s financial condition, results of operations, or cash flow. Therefore, no reserves for uncertain income tax positions have been recorded pursuant to ASC 740.
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Recently Adopted Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board, or FASB, issued ASU 2014-09, “Revenue from Contracts with Customers (ASC 606),” and issued subsequent amendments to the initial guidance or implementation guidance between August 2015 and November 2017 within ASU 2015-04, ASU 2016-08, ASU 2016-10, ASU 2016-12, ASU 2016-20, ASU 2017-13, and ASU 2017-14 (collectively, including ASU 2014-09, “ASC 606”). Under ASC 606, revenue is recognized when a customer obtains control of promised goods or services and is recognized in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The Company adopted the standard from the second quarter of fiscal year 2020. The adoption of ASC 606 did not have any impact on our previously reported consolidated financial statements in any prior period nor did it result in a cumulative effect adjustment to retained earnings.
Note 3 – Going Concern
The Company’s financial statements are prepared in accordance with generally accepted accounting principles applicable to a going concern that contemplates the realization of assets and liquidation of liabilities in the normal course of business.
Prior to March 2020, the Company demonstrated adverse conditions that raised substantial doubt about the Company’s ability to continue as a going concern. These adverse conditions were negative financial trends, specifically operating loss, working capital deficiency, and other adverse key financial ratios. Also, the Company had not established any source of revenue to cover its operating costs. The Company’s management funded operating expenses with related party contributions to capital.
However, on March 9, 2020, the Company commenced business operations upon entering into the A&R Distribution Agreement with Bidi, a related party company, whereby Bidi granted the Company an exclusive worldwide right to distribute the Products for sale and resale to both retail level customers and non-retail level customers.
In April, in connection with the A&R Distribution Agreement, the Company entered into the A&R Sub-Distribution Agreements with certain third-party counterparties, whereby the Company appointed such counterparties as non-exclusive sub-distributors. Pursuant to the A&R Sub-Distribution Agreements, the sub-distributors agreed to purchase for resale the Products in such quantities as they should need to properly service non-retail customers within the Territory.
With these agreements in effect, the Company has established sources of revenue to cover its operating costs and achieved net income of $3,721,069 during the nine months ended July 31, 2020. As of July 31, 2020, the Company has a positive working capital of $4,023,496.
Management plans to continue similar operations with increased marketing, which the Company believes will result in increased revenue and net income. However, there is no assurance that management’s plan will be successful due to the current economic climate in the United States and globally. At the time of filing this Quarterly Report, the previously reported going concern has been alleviated based on the reasons above, and management does not have substantial doubt of the Company’s ability to continue as a going concern.
These financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classification of liabilities that might be necessary in the event that the Company cannot continue as a going concern.
Note 4 – Commitments and Contingencies
On March 31, 2020, and as amended on June 2, 2020, the Company entered into the Amended Service Agreement with QuikfillRx, whereby QuikfillRx agreed to provide the Company with to the Services, consisting of sales management, website development and design, graphics, content, public communication, social media, management and analytics, and market and other research. The Services will be provided by QuikfillRx as requested from time to time by the Company.
As a result of the First Amendment, “General Compensation” consists of the following: (i) for the Services (as defined in the Service Agreement) provided in March 2020, the Company paid QuikfillRx an amount equal to $86,000; (ii) for the Services provided in April 2020, the Company paid QuikfillRx an amount equal to $100,000; (iii) each calendar month commencing May 2020 through October 2020, the Company will pay QuikfillRx an amount equal to $125,000 per month for the Services to be performed during such calendar month; (iv) if the parties agree to extend the term of the Service Agreement beyond the original expiration date of October 31, 2020, then for the period between November 1, 2020 and October 31, 2021, the Company will pay QuikfillRx $125,000 per month for the Services to be performed during such calendar month; and (iv) if the parties agree to extend the term of the Service Agreement beyond October 31, 2021, then for the period between November 1, 2021 and October 31, 2022, the Company will pay QuikfillRx $150,000 per month for the Services to be performed during such calendar month.
In addition, pursuant to the Amended Service Agreement, the Company will pay QuikfilRx an amount equal to 0.9% of the Applicable Gross Quarterly Sales, which amount shall, at the Company’s option, be paid in (a) cash or (b) shares of the Company’s common stock, or (c) a combination of cash and common stock, subject to certain conditions, and an amount equal to 0.27% of the Applicable Gross Quarterly Sales, which amount must be paid in cash.
Note 5 – Stockholders’ Equity
Additional Paid-In Capital
The Company’s Chief Executive Officer and Chief Financial Officer, Mr. Nirajkumar Patel, paid expenses on behalf of the Company totaling $16,257 during the nine months ended July 31, 2020, which is considered a contribution to the Company with no expectation of repayment and is recorded as additional paid-in capital.
The Company’s Chief Operating Officer, Mr. Eric Mosser, paid expenses on behalf of the Company totaling $10,900 during the nine months ended July 31, 2020, which is considered a contribution to the Company with no expectation of repayment and is recorded as additional paid-in capital.
Shares of Common Stock Issued
During the quarter ended July 31, 2020, 3,320,574 shares of common stock, valued and expensed at $202,555, were issued to QuikfillRx as compensation for the Services rendered to the Company.
During the quarter ended July 31, 2020, 9.5 million shares of common stock were granted to seven employees of the Company. 810,000 shares of common stock, valued and expensed at $117,600, were issued to these employees as bonus compensation. Unamortized shares granted to the seven employees at July 31, 2020 totaled 8,690,000 shares and are valued at $1,242,400.
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Note 6 – Related-Party Transactions
Revenue and Accounts Receivable
During the nine months ended July 31, 2020, the Company generated $65,000, $18,990, $2,420, and $110 of revenue from Cloud Nine 2012, Inc., JC Products of USA, LLC, Shree Maharaj, Inc., and Bhawani Krupa, Inc., respectively. All of these companies are owned by Nirajkumar Patel, the Chief Executive Officer and Chief Financial Officer of the Company, and/or his wife. As of July 31, 2020, the Company has accounts receivable from Cloud Nine 2012, Inc. and Bhawani Krupa, Inc. in the amount of $19,800 and $110, respectively.
Purchases and Accounts Payable
During the nine months ended July 31, 2020, the Company purchased $47,771,211 of Products from Bidi and sold $55,010,416 of Products to retail and non-retail customers. As of July 31, 2020, the Company had accounts payable to Bidi of $4,286,852. Bidi is owned by Nirajkumar Patel, the Company’s Chief Executive Officer and Chief Financial Officer.
Contributed Capital
During the nine months ended July 31, 2020, Nirajkumar Patel, the Company’s Chief Executive Officer and Chief Financial Officer, and Eric Mosser, the Company’s Chief Operating Officer, contributed capital of $16,257 and $10,900, respectively, to the Company. For additional information, see Note 5, Stockholders’ Equity.
Office Space
We utilized the home office space and warehouse of our management at no cost through July 31, 2020.
Note 7 - Concentration
Financial instruments, which potentially subject the Company to concentrations of credit risk, consist primarily of purchases of inventories, accounts payable, accounts receivable, and revenue.
Concentration of Purchases and Accounts Payable
For the nine months ended July 31, 2020, 100% of the inventories of Products, primarily consisting of the “Bidi Stick,” were purchased from Bidi, a related party, in the amount of $47,771,211. It also accounted for 100% of the total accounts payable - related party as of July 31, 2020.
Concentration of Revenues and Accounts Receivable
For the three months ended July 31, 2020, approximately 56% of the revenue from the sale of Products, primarily consisting of the “Bidi Stick”, was generated from Favs Business, LLC (“Favs Business”) in the amount of $18,325,140.
For the nine months ended July 31, 2020, approximately 48% of the revenue from the sale of Products, primarily consisting of the “Bidi Stick,” was generated from Favs Business in the amount of $26,328,535.
Favs Business accounted for approximately 71% of the total accounts receivable as of July 31, 2020.
Note 8 – Income Tax
The Company is subject to federal income taxes and state income tax in the United States. Significant judgment is required in determining the provision for income taxes and income tax assets and liabilities, including evaluating uncertainties in the application of accounting principles and complex tax laws.
The Tax Cuts and Jobs Act (the “Tax Act”) was enacted on December 22, 2017, and reduced the U.S. federal corporate tax rate from 35% to 21%, eliminated corporate Alternative Minimum Tax, modified rules for expensing capital investment, and limited the deduction of interest expense for certain companies. The Company fulfilled and shipped all of the Products from Florida and, thus, it is subject to the state corporate income tax of Florida with a tax rate of 4.458%.
During the nine months ended July 31, 2020, the Company generated taxable income of $4,991,910 and, thus, accrued $1,048,301 of federal income tax and $222,540 of state income tax.
Significant components of the Company’s deferred tax assets and liabilities as of July 31, 2020 and October 31, 2019 after applying enacted corporate income tax rate, is net operating loss carryforward of $0 and $15,377, and a valuation allowance of $0 and $15,377, respectively, which is a total deferred tax asset of $0. The Company’s tax returns for 2018 and 2019 remain open to examination.
Note 9 – Subsequent Events
On August 1, 2020, the Company began leasing office space consisting of 1,595 square feet as its main corporate office in Grant, Florida for $1,000 per month. The five-year lease agreement is with related party, Just Pick, LLC (“Just Pick”). Nirajkumar Patel, our Chief Executive Officer and Chief Financial Officer, is also an officer of Just Pick.
On August 19, 2020, the Company entered into the Share Cancellation and Exchange Agreement with KH, its majority stockholder, whereby KH returned the Cancellation Shares to the Company for cancellation. Following such cancellation, KH owns 204,000,000 shares of the Company’s common stock.
In connection therewith, and in exchange for the Cancellation Shares, the Company issued the Preferred Shares consisting of 3,000,000 shares of Series A Preferred Stock, to KH.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s Discussion and Analysis of Financial Condition and Results of Operations is designed to provide a reader of the financial statements with a narrative report on our financial condition, results of operations, and liquidity. This discussion and analysis should be read in conjunction with the unaudited Financial Statements and notes thereto for the three and nine months ended July 31, 2020 included under Item 1 – Financial Statements in this Quarterly Report and our audited Financial Statements and notes thereto for the year ended October 31, 2019 contained in our Annual Report on Form 10-K. The following discussion contains forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations, and intentions. Our actual results could differ materially from those discussed in the forward-looking statements. Please also see the cautionary language at the beginning of this Quarterly Report regarding forward-looking statements.
The discussions of our results as presented in this Quarterly Report include use of the non-GAAP term “gross profit. Gross profit is determined by deducting the cost of goods sold from operating revenue. Cost of goods sold includes direct and indirect labor, materials, services, fixed costs, and variable overhead. Gross profit should not be considered an alternative to operating income or net income, which are determined in accordance with GAAP. We believe that gross profit, although a non-GAAP financial measure, is useful and meaningful to investors as a basis for making investment decisions. It provides investors with information that demonstrates our cost structure and provides funds for our total costs and expenses. We use gross profit in measuring the performance of our business. Other companies may calculate gross profit in a different manner.
Potential Impact of COVID-19
In March 2020, the WHO declared the outbreak of COVID-19 as a pandemic based on the rapid increase in global exposure. COVID-19 continues to spread throughout the world, including the United States. Our business operations, which commenced during this pandemic, continue to be operational and, to date, we have not seen any significant direct negative impact of COVID-19 to our newly commenced business. However, the COVID-19 pandemic continues to impact economic conditions, which could impact the short-term and long-term demand from our customers and, therefore, has the potential to negatively impact our results of operations, cash flows, and financial position in the future. Management is actively monitoring this situation and any impact on our financial condition, liquidity, and results of operations. However, given the daily evolution of the COVID-19 pandemic and the global responses to curb its spread, we are not presently able to estimate the effects of the COVID-19 pandemic on our future results of operations, financial condition, or liquidity for the remainder of fiscal year 2020 and, possibly, beyond.
Corporate History
We were incorporated on September 4, 2018 in the State of Delaware. We are focused on growing and incubating innovative and profitable products into mature, dominant brands.
USSE Corp. and USSE Delaware Merger
USSE Nevada was incorporated with the Nevada Secretary of State on July 8, 1998 under the original name C&A Restaurants. On June 15, 2009, C&A Restaurants changed its name to USSE Corp.
Effective September 19, 2018, USSE Nevada re-domiciled from Nevada to Delaware pursuant to a merger of USSE Nevada with and into USSE Delaware, with USSE Delaware as the surviving entity.
Holding Company Reorganization
On September 4, 2018, USSE Delaware acquired 1,000 shares of our common stock, which represented 100% of our then-outstanding shares of common stock, for no consideration, resulting in us becoming a wholly-owned subsidiary of USSE Delaware. Also, immediately prior to the Holding Company Reorganization, USSE Merger Sub was our wholly-owned subsidiary.
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At the Effective Time, and in accordance with the provisions set forth in Section 251(g) of the DGCL, USSE Merger Sub, an indirect wholly-owned subsidiary of USSE Delaware and our direct wholly-owned subsidiary, merged with and into USSE Delaware, our then parent. 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, limitations, 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 cancelled.
This resulted in us being authorized to issue up to 1,005,000,000 shares, which consisted of: (i) 1,000,000,000 shares of common stock, par value $0.001 per share of which 66,397,574 shares were then issued and outstanding; (ii) 5,000,000 shares of preferred stock, par value $0.001 per share, of which (a) 1,000,000 shares were designated as Convertible Series A, all of which were then issued and outstanding; and (b) 500,000 shares were designated as Convertible Series B, of which 71,700 shares of Convertible Series B preferred stock were then issued and outstanding.
Post-Holding Company Reorganization
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 for services rendered to us.
Commensurate with the filing of our Amended and Restated Certificate of Incorporation with the Delaware Secretary of State on October 22, 2018, every issued and outstanding share of Convertible Series A preferred stock was converted into 1.25 shares of common stock with stockholders’ economic rights preserved. Additionally, at the same time, every share of Convertible Series B preferred stock, issued and outstanding was converted into ten shares of common stock with stockholders’ economic rights adversely affected in the conversion. Immediately following the conversion of the aforementioned shares, and upon filing of the Amended and Restated Certificate of Incorporation, the authorized and unissued shares of Convertible Series A and Convertible Series B preferred stock were cancelled. As of October 22, 2018, Convertible Series A and Series B preferred stock were removed from the status of authorized but unissued preferred stock.
On February 6, 2019, we entered into the Agreement, by and among us, GMRZ, and KH, 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 KH, and KH paid GMRZ the Purchase Price. The consummation of the transactions contemplated by the Agreement resulted in a change in control, with KH becoming our largest controlling stockholder. Nirajkumar Patel and Eric Mosser are the sole voting members of KH. The Purchase Price was paid with personal funds of the members of KH.
Effective July 12, 2019, we changed our corporate name from Quick Start Holdings, Inc. to Kaival Brands Innovations Group, Inc. The name change was effected through a parent/subsidiary short-form merger of Kaival Brands Innovations Group, Inc., the Company’s wholly-owned Delaware subsidiary formed solely for the purpose of the name change, with and into us. We were the surviving entity.
On the effective date of the merger, our name was changed to “Kaival Brands Innovations Group, Inc.” and the Charter, was further amended to reflect our new legal name. There were no other changes to its Charter.
Share Cancellation and Exchange Agreement
On August 19, 2020, we entered into a Share Cancellation and Exchange Agreement with our controlling stockholder, KH. Nirajkumar Patel and Eric Mosser, our current officers and directors, are the only voting members of KH.
Pursuant to the Agreement, KH returned to us the Cancellation Shares, consisting of 300,000,000 shares of our common stock, which Cancellation Shares have now been cancelled and retired by us.
On August 19, 2020, we filed the Certificate of Designation with the Secretary of State of the State of Delaware, which authorizes a total of 3,000,000 shares of Series A Preferred Stock.
In exchange for the Cancellation Shares, we issued the Preferred Shares, consisting of 3,000,000 shares of Series A Preferred Stock to KH. The exchange of the Cancellation Shares and the issuance of the Preferred Shares is intended to comply with Section 3(a)(9) of the Act, in that the issuance is 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.
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Our Business
Currently, we market and place the Products into national distribution channels through long-standing industry relationships in accordance with the A&R Distribution Agreement entered into with Bidi, a related party, in March 2020 (and subsequently amended and restated in May 2020. Pursuant to the A&R Distribution Agreement, we sell and resell the Products to both retail level customers and non-retail level customers. Bidi’s primary product is the “Bidi Stick.” Bidi is considered a related party to us because our Chief Executive Officer, Chief Financial Officer, and director, Mr. Nirajkumar Patel, owns and controls Bidi. Mr. Patel is also a beneficial owner of KH, the entity that is our largest controlling stockholder. Thus, Bidi and we are under common control.
Pursuant to the terms of the A&R Distribution Agreement, Bidi provides us with all branding, logos, and marketing materials to be utilized by us in connection with our marketing and promotion of the Products. We engaged QuikfillRx in March 2020 and, pursuant to the Amended Service Agreement, QuikfillRx agreed to provide us with the Services, as we may request from time to time.
We process all sales made to retail customers and non-retail customers, with all sales to retail customers to be made through the website, www.bidivapor.com. We provide all customer service and support at our own expense. Bidi sets the minimum prices for all sales made by us. With respect to sales to non-retail customers, we submit purchase orders to Bidi, Bidi delivers the Products to us, and we ship the Products directly to these non-retail customers. In the case of retail customers, we maintain adequate inventory levels of the Products in order to meet these customers’ demand, and deliver the Products sold to these retail customers.
In connection with the A&R Distribution Agreement, we entered into the A&R Sub-Distribution Agreements with certain counterparties, pursuant to which we appointed such counterparties as non-exclusive sub-distributors of the Products to non-retail customers within the Territory. Each of the A&R Sub-Distribution Agreements set forth certain minimum purchase obligations.
We believe that over the course of the next twelve months, our business operations will generate the capital needed to achieve our business objectives; however, because we recently commenced business operations, there can be no assurance that our business operations will continue to generate the cash flows required for us to achieve our business objectives. If we require additional capital, there can be no assurance that we will be able to raise any required capital or that capital will be available to us at acceptable terms, or at all. We believe that our cash provided by operations will be sufficient for the next twelve months.
As a result of the commencement of business operations, in March 2020, we began hiring employees and intend to hire additional independent contractors and/or employees in the future. We cannot provide any assurance as to the timing of the hiring of any additional independent contractors or employees, the number of independent contractors or employees that we may hire, and whether acceptable independent contractors or employees will be available to us at that time.
Going Concern
Prior to March 2020, we demonstrated adverse conditions that raised substantial doubt about our ability to continue as a going concern. These adverse conditions were negative financial trends, specifically operating loss, working capital deficiency, and other adverse key financial ratios. Also, we had not established any source of revenue to cover its operating costs. Our management funded operating expenses with related party contributions to capital.
However, on March 9, 2020, we commenced business operations upon entering into the A&R Distribution Agreement with Bidi, a related party company, whereby Bidi granted us an exclusive worldwide right to distribute the Products for sale and resale to both retail level customers and non-retail level customers.
In April, in connection with the A&R Distribution Agreement, we entered into the A&R Sub-Distribution Agreements with certain third-party counterparties, whereby we appointed such counterparties as non-exclusive sub-distributors. Pursuant to the A&R Sub-Distribution Agreements, the sub-distributors agreed to purchase for resale the Products in such quantities as they should need to properly service non-retail customers within the Territory.
With these agreements in effect, we have established sources of revenue to cover our operating costs and achieved net income of $3,721,069 during the nine months ended July 31, 2020. As of July 31, 2020, we had a positive working capital of $4,023,496.
Management plans to continue similar operations with increased marketing, which we believe will result in increased revenue and net income. However, there is no assurance that management’s plan will be successful due to the current economic climate in the United States and globally. At the time of filing this Quarterly Report, the previously reported going concern has been alleviated based on the reasons above, and management does not have substantial doubt our ability to continue as a going concern.
These financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classification of liabilities that might be necessary in the event that we cannot continue as a going concern.
The unaudited financial statements filed as part of this Quarterly Report do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classification of liabilities that might be necessary in the event that we cannot continue as a going concern.
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Liquidity and Capital Resources
We have no known demands or commitments and are not aware of any events or uncertainties as of July 31, 2020 that will result in or that are reasonably likely to materially increase or decrease our current liquidity.
At July 31, 2020, we had working capital of approximately $4.0 million and total cash of approximately $2.7 million.
Now that we have commenced business operations, we intend to generally rely on cash from operations and equity and debt offerings, to the extent necessary and available, to satisfy our liquidity needs. There are a number of factors that could result in the need to raise additional funds, including a decline in revenue or a lack of anticipated sales growth and increased costs. Our efforts are directed toward generating positive cash flow and profitability. If these efforts are not successful, we may need to raise additional capital. Should capital not be available to us at reasonable terms, other actions may become necessary in addition to cost control measures and continued efforts to increase sales. These actions may include exploring strategic options for the sale of the Company, the creation of joint ventures or strategic alliances under which we will pursue business opportunities, or other alternatives. We believe we have the financial resources to weather any short-term impacts of COVID-19; however, we are unable to presently estimate any potential future impacts from COVID-19 and an extended impact could have a material and adverse effect on our sales, earnings, and liquidity.
Cash Flows:
Cash flow provided by operations was approximately $2.7 million for the first nine months of fiscal year 2020, compared to $0 for the first nine months of fiscal year 2019. The increase in cash flow from operations for the first nine months of fiscal year 2020 was mainly due to the increase in net income. We anticipate continued improvement in our cash flows provided by operations in future years based on the minimum purchase obligations set forth in the A&R Sub-Distribution Agreements, partially offset by increases in costs as we ramp up our sales and marketing efforts.
Three months ended July 31, 2020, compared to three months ended July 31, 2019
Revenues:
Revenues for the third quarter of fiscal year 2020 were approximately $32.4 million, compared to $0 in the same period of the prior fiscal year. During the second quarter of fiscal year 2020, we entered into the A&R Distribution Agreement, pursuant to which we were granted the exclusive, worldwide right to distribute the Products. In connection therewith, we entered into the A&R Sub-Distribution Agreements and other agreements with counterparties and granted such sub-distributors the right to distribute the Products to non-retail customers within the Territory.
Cost of Revenue and Gross Profit:
Gross profit in the third quarter of fiscal year 2020 was approximately $4.4 million, compared to $0 for the third quarter of fiscal year 2019. Total cost of revenue was approximately $27.9 million for the third quarter of fiscal year 2020, compared to $0 for the third quarter of fiscal year 2019. The increase in gross profit is entirely driven by the sales of the Products during the third quarter of fiscal year 2020.
Operating Expenses:
Total operating expenses were approximately $1.5 million for the third quarter of fiscal year 2020, compared to $27,135 for the third quarter of fiscal year 2019. For the third quarter of fiscal year 2020, operating expenses consisted of commissions paid pursuant to the Amended Service Agreement of approximately $769,000 and general and administrative expenses of approximately $705,000. General and administrative expenses in the third quarter of fiscal year 2020 consisted primarily of legal fees, salaries, professional fees, merchant fees, and other service fees. Total operating expenses for the third quarter of fiscal 2019 consisted solely of general and administrative expenses, which were primarily from legal fees incurred. We expect future operating expenses to continue to increase while we generate increased sales growth.
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Income Taxes:
During the third quarter of fiscal year 2020, we accrued approximately $320,000 for income taxes, compared to $0 for the third quarter of fiscal year 2019. Please refer to Note 8, Income Tax, in the Notes to the Financial Statements in this Quarterly Report for additional information related to our income taxes.
Net Income (Loss):
Net income for the third quarter of fiscal year 2020 was approximately $2.6 million, or $0.00 basic and diluted earnings per share, compared to net loss of approximately $27,000, or $0.00 basic and diluted loss per share, for the third quarter of fiscal year 2019. The increase in net income for the third quarter of fiscal year 2020, as compared to the third quarter of fiscal year 2019, is attributable to the commencement of sales of the Products.
Weighted-average common stock shares outstanding were 575,746,039 in the third quarter of fiscal year 2020 and 572,364,574 for the third quarter of fiscal year 2019.
Nine months ended July 31, 2020, compared to nine months ended July 31, 2019
Revenues:
Revenues for the first nine months of fiscal year 2020 was approximately $54.9 million, compared to $0 in the same period of the prior fiscal year. During our second fiscal quarter for 2020, we entered into the A&R Distribution Agreement, pursuant to which we were granted the exclusive, worldwide right to distribute the Products. In connection therewith, we entered into the A&R Sub-Distribution Agreements and other agreements with counterparties and granted such sub-distributors the right to distribute the Products to non-retail customers within the Territory.
Cost of Revenue and Gross Profit:
Gross profit in the first nine months of fiscal year 2020 was approximately $6.9 million, compared to $0 for the first nine months of fiscal year 2019. Total cost of revenue was approximately $47.9 million for the first nine months of fiscal year 2020, compared to $0 for the first nine months of fiscal year 2019. The increase in gross profit is entirely driven by the commencement of sales of the Products during the first nine months of fiscal year 2020.
Operating Expenses:
Total operating expenses were approximately $1.9 million for the first nine months of fiscal year 2020, compared to approximately $45,000 for the first nine months of fiscal year 2019. For the first nine months of fiscal year 2020, operating expenses consisted of commissions of approximately $1.0 million and general and administrative expenses of approximately $916,000. General and administrative expenses in the first nine months of fiscal year 2020 consisted primarily of legal fees, salaries, bonuses, professional fees, merchant fees, and other service fees. Total operating expenses for the first nine months of fiscal year 2019 consisted solely of general and administrative expenses, which were primarily from legal fees incurred. We expect future operating expenses to continue to increase while we generate increased sales growth.
Income Taxes:
During the first nine months of fiscal year 2020, we accrued approximately $1.3 million for income taxes, compared to $0 for the first nine months of fiscal year 2019. Please refer to Note 8, Income Tax, in the Notes to the Financial Statements in this Quarterly Report for additional information related to our income taxes.
Net Income (Loss):
Net income for the first nine months of fiscal year 2020 was approximately $3.7 million, or $0.01 basic and diluted earnings per share, compared to net loss of approximately $45,000, $0.00 basic and diluted loss per share, for the first nine months of fiscal year 2019. The increase in net income for the first nine months of fiscal year 2020, as compared to the first nine months of fiscal year 2019, is attributable to the commencement of sales of the Products.
Weighted-average common stock shares outstanding were 573,499,956 in the first nine months of fiscal year 2020 and 572,364,574 for the first nine months of the fiscal year 2019.
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Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources that is material to investors.
Critical Accounting Policies and Estimates
Other than the policy changes disclosed in Note 2, Basis of Presentation and Significant Accounting Policies, to the unaudited Financial Statements in Item 1 of Part I of this Quarterly Report, there have been no material changes to our critical accounting policies and estimates during the nine months ended July 31, 2020 from those disclosed in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K for the year ended October 31, 2019.
Recently Adopted Accounting Pronouncements
See Note 2, Basis of Presentation and Significant Accounting Policies, to the unaudited Financial Statements in Item 1 of Part I of this Quarterly Report for a description of recent accounting pronouncements and accounting changes.
We are an “emerging growth company,” 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 SEC’s reporting and disclosure rules. We have elected to use the extended transition period for complying with new or revised accounting standards under Section 102(b)(2) of the JOBS Act, that 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. As a result of this election, our financial statements may not be comparable to companies that comply with public company effective dates.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide the information required by this Item.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of July 31, 2020, the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that because of material weakness in our internal control over financial reporting, our disclosure controls and procedures were not effective as of July 31, 2020.
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act, is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitations, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and our principal financial officer, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
During the quarter ended July 31, 2020, there was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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There are no material pending legal proceedings as defined by Item 103 of Regulation S-K, to which we are a party or of which any of our property is the subject, other than ordinary routine litigation incidental to the Company’s business.
As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide the information required by this Item.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
None.
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The following exhibits are filed herewith as a part of this Quarterly Report.
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| (1) | Schedules and Exhibits omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company agrees to furnish supplementally a copy of any omitted schedule to the Securities and Exchange Commission upon request; provided, however, that the Company may request confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended, for any Schedule or Exhibit so furnished. |
*filed herewith
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| KAIVAL BRANDS INNOVATIONS GROUP, INC. | ||
| Date: September 14, 2020 | By: | /s/ Nirajkumar Patel |
| Nirajkumar Patel | ||
President, Chief Executive Officer, and Chief Financial Officer | ||
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Exhibit 10.14
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