Stockholders’ Equity

9 Months Ended

Jul. 31, 2022

Equity [Abstract]

Stockholders’ Equity

Note 5 – Stockholders’ Equity

Additional Paid-In Capital

During the nine months ended July 31, 2022, $4,854,313 of stock option expense was recognized and contributed to Additional Paid-In Capital. Also, during the nine months ended July 31, 2022, on November 5, 2021 and February 5, 2022, restricted stock units (“RSUs”) previously granted to employees vested and shares of Common Stock were issued, which contributed $130,502 to Additional Paid-In Capital. Additionally, during the nine months ended July 31, 2022, warrants of the Company were exercised for shares of Common Stock resulting in a further contribution to Additional Paid-in Capital of $1,571,013. All of these contributions resulted in a total increase in Additional Paid-In Capital during the nine months ended July 31, 2022 of $6,555,828.

Preferred Shares Converted

The authorized preferred stock of the Company consists of 5,000,000 shares with a par value of $ 0.001 per share, of which 3,000,000 shares were designated as Series A Convertible Preferred Stock (the “Series A Preferred Stock”). Each share of the Series A Preferred Stock was initially convertible into 100 shares of Common Stock; however, as a result of the Reverse Stock Split, the conversion rate was adjusted such that each share of the Series A Preferred Stock is convertible into approximately 8.33 shares of Common Stock. On June 24, 2022, all 3,000,000 shares of Series A Preferred Stock were converted into shares of Common Stock by Kaival Holdings, LLC, a related party. The conversion of 3,000,000 shares of Series A Preferred Stock, at a conversion rate of 8.33, equaled 25,000,000 shares of Common Stock. As a result, the authorized, preferred stock of the Company consists of 5,000,000 shares with a par value of $0.001 per share, with 0 shares of preferred stock issued or outstanding as of July 31, 2022.

Common Shares Issued

The Company implemented the Reverse Stock Split, effective prior to the opening of the market on July 20, 2021. The Reverse Stock Split was implemented by the Company in support of its application to list on the Nasdaq Capital Market (“Nasdaq”). As a result of the Reverse Stock Split at a ratio of 1-for-12, every 12 shares of the Common Stock were exchanged for one share of the Common Stock. The Company has retroactively adjusted all share amounts and per share data herein to give effect to the Reverse Stock Split.

During the three months ended July 31, 2022, on June 14, 2022, stockholders of the Company exercised 3,000 warrants to purchase 3,000 shares of the Common Stock for net proceeds of $5,700. During the nine months ended July 31, 2022, stockholders of the Company exercised warrants to purchase 876,286 shares of the Company’s common stock for net proceeds of $1,571,890.

The authorized Common Stock of the Company consists of 1,000,000,000 shares with a par value of $0.001 per share. There were 56,169,090 shares of Common Stock issued and outstanding as of July 31, 2022. There were 30,195,312 shares of the Common Stock issued and outstanding as of October 31, 2021.

During the three months ended April 30, 2022, the Company issued 18,160 shares of Common Stock with the fair value of $18,160 to two vendors who provide legal and advertising and promotions services to the Company. Those vendors preferred to be paid in shares of Common Stock instead of cash for the services they performed and billed the Company.  

Warrant Shares Issued

As part of the Company’s underwritten public offering in September 2021, the Company issued warrants to purchase a total of 4,053,750 shares of Common Stock at an exercise price of $1.90 per share. These warrants expire in 2026. Warrants for 876,286 shares of Common Stock were exercised during the nine-month period ended July 31, 2022, 2022 for net proceeds of $1,571,890. The aggregate intrinsic value of the outstanding Common Stock warrants as of July 31, 2022 and October 31, 2021 was $0. The weighted average remaining term of the outstanding Common Stock warrants is 4.25 years as of July 31, 2022.

The following is a summary of the stock warrant activity during the fiscal nine months ended July 31, 2022 and the year ended October 31, 2021.

	Nine Months Ended July 31, 2022					Year Ended October 31, 2021
	Number of Warrants			Weighted Average Exercise Price		Number of Warrants			Weighted Average Exercise Price
Warrants Outstanding at Beginning of the Period		3,173,922		$	1.90		—		$	1.90
Granted		—			—		4,053,750			1.90
Exercised		(876,286	)		1.90		(879,828	)		1.90
Warrants Outstanding and Exercisable at End of Period		2,297,636		$	1.90		3,173,922		$	1.90

Restricted Stock Unit Awards

On November 5, 2021, the Company issued 61,250 shares of Common Stock to 7 employees in accordance with the vesting schedules set forth in restricted stock unit (“RSU”) agreements previously entered into with such employees, resulting in the recognition of approximately $110,250 of share-based compensation. Of the shares issued to employees, 19,866 shares were withheld by the Company to satisfy tax withholding obligations and/or satisfy cash settlement options to employees, equaling approximately $35,759.

On February 5, 2022, the Company issued 62,006 shares of Common Stock to 7 employees in accordance with the vesting schedules set forth in RSU agreements previously entered into with such employees, resulting in the recognition of $62,006 of share-based compensation. Of the shares issued to employees, 24,058 shares were withheld by the Company to satisfy tax withholding obligations and/or satisfy cash settlement options to employees, equaling approximately $24,058. On March 4, 2022, the Company’s Board approved the termination of the RSU agreements with the consent of the employees. At the time these agreements were terminated, there remained 1,564,166 unvested RSUs with approximately $4,457,875 of related unvested compensation. See Common Stock Compensation Transition Plan below for additional details.

Stock Options

During fiscal year 2021, the Company granted options exercisable for up to 150,000 shares of Common Stock of which 15,000 fully vested on March 17, 2021, 7,500 fully vested on June 30, 2021, 41,667 fully vested on December 1, 2021, 17,500 vested on March 17, 2022, 8,750 vest on June 30, 2022 and 1,248 vest over the next year on March 17, 2023 and June 30, 2023. The options have exercise prices ranging from $9.12 to $28.68 per share. On July 19, 2021, two of the stock option agreements, exercisable for an aggregate of 50,000 shares of Common Stock, were modified to accelerate the full vesting period from 3 years to 2 years. On June 24, 2022, 33,333 of the stock options reference above were canceled and a further 25,002 were cancelled in the current quarter. As of July 31, 2022, the amortized expense and unamortized expense of these stock options was $2,448,412 and $376,249, respectively.

On February 27, 2022, non-qualified stock options exercisable for up to 200,000 shares of Common Stock were awarded to two consultants of the Company. These stock options have a ten-year term from the grant date, with one-half of the shares vesting on the grant date and the remaining one-half of the shares vesting on the first anniversary of the grant date. The stock options exercisable for an aggregate of up to 200,000 shares of Common Stock. The fair value of the options on the grant dates was $489,998 using a Black-Scholes option pricing model with the following assumptions: stock price $2.45 per share (based on the quoted trading price on the date of grant), a computed volatility of 294.93%, expected term of 10 years, and a risk-free interest rate of 1.83%. As of July 31, 2022, the amortized expense and unamortized expense of these stock options was $347,082 and $142,916, respectively.

On April 22, 2022, non-qualified stock options exercisable for up to 75,000 shares of Common Stock were awarded to one consultant of the Company. These stock options have a ten-year term from the grant date, with one-half of the shares vesting on the June 30, 2022 and the remaining one-half of the shares vesting on October 31, 2022. The stock options exercisable for an aggregate of up to 75,000 shares of Common Stock. The fair value of the options on the grant date was $106,499 using a Black-Scholes option pricing model with the following assumptions: stock price $1.42 per share (based on the quoted trading price on the date of grant), a computed volatility of 286.00%, expected term of 10 years, and a risk-free interest rate of 2.90%. As of July 31, 2022, the amortized expense and unamortized expense of these stock options was $80,984 and $25,515, respectively.

The Company granted new options during the three months ended July 31, 2022. On May 18, 2022, non-qualified stock options exercisable for up to 500,000 shares of Common Stock were awarded to one consultant of the Company. These stock options have a ten-year term from the grant date, with the shares fully vesting on December 1, 2022. The stock options exercisable for an aggregate of up to 500,000 shares of Common Stock. The fair value of the options on the grant date was $514,997 using a Black-Scholes option pricing model with the following assumptions: stock price $1.03 per share (based on the quoted trading price on the date of grant), a computed volatility of 284.70%, expected term of 10 years, and a risk-free interest rate of 2.89%. As of July 31, 2022, the amortized expense and unamortized expense of these stock options was $193,451 and $321,546, respectively.

On March 4, 2022 options exercisable for up to an aggregate of 1,385,600 shares of Common Stock were granted from this new stock option program to the executive officers and employees, as a result of the transition.

The fair values of the options on the grant dates, as noted above, were approximately $3,948,948 using a Black-Scholes option pricing model with the following assumptions: stock price $2.85 per share (based on the quoted trading price on the date of grant), volatility of 294.55%, expected term of 10 years, and a risk-free interest rate range of 1.62%. The Company is amortizing the expense over the vesting terms of each option. The total stock option expense for the three and nine months ended July 31, 2022 was approximately $493,619 and $2,797,172, respectively. The fiscal year 2022 unamortized stock option expense at July 31, 2022 was approximately $1,151,771. Please reference the Common Stock Compensation Transition Plan below.

On June 24, 2022, non-qualified stock options exercisable for up to 875,000 shares of Common Stock were awarded to two officers and three board members of the Company. These stock options have a ten-year term from the grant date, with 375,000 fully vested on June 24, 2022, and 500,000 vest over the next 2 years on June 23, 2023 and June 23, 2024. The fair value of the options on the grant dates was $1,504,990 using a Black-Scholes option pricing model with the following assumptions: stock price $1.72 per share (based on the quoted trading price on the date of grant), a computed volatility of 283.12%, expected term of 10 years, and a risk-free interest rate of 3.13%. As of July 31, 2022, the amortization expense and unamortized expense for these stock options for the three months ended July 31, 2022 was $712,183 and $792,807.

These options have a weighted average remaining life of 9.43 years as of October 31, 2021 and of 9.78 years as of July 31, 2022. The options expire in the years 2031 and 2032. The aggregate intrinsic value of these outstanding options as of October 31, 2021 and July 31, 2022 was $0.

Common Stock Compensation Transition Plan

During the second quarter of fiscal year 2021 the Board and executive management began cost reduction discussions, including the reduction of non-cash items such as equity compensation awards. Those discussions stalled primarily due to the focus on other corporate events of significant value.

In the first and second fiscal quarters of 2022, the Board resumed serious discussions, assessments, and evaluations regarding the equity compensation awarded to its officers and employees. The Board ultimately approved a stock option program for equity awards granted to its officers and employees. The Compensation Committee spent considerable time, effort, and resources designing this program, which was finalized in February 2022 and approved in March 2022. While evaluating and designing this program, the Compensation Committee did not utilize any aspects of value to the employees or other features. Therefore, the termination of the RSU program and the newly adopted stock option program were developed completely independent of each other and terminated and implemented, respectively, distinctly and simultaneously. Management concluded under ASC 718 these transactions are a cancelation and replacement whereby total compensation cost measured at the date of a cancellation and replacement is the portion of the grant-date fair value of the original award for which the service is expected to be rendered at that date plus the incremental cost resulting from the cancellation and replacement. Incremental cost is measured as the excess of the fair value of the replacement award over the fair value of the cancelled award at the cancellation date in which there was none since the fair value of the replacement award was less than the fair value of the canceled award.

The outcomes of this decision and the transition on March 4, 2022 resulting in: (i) the termination of the RSU program for all executive officers and employees, consisting of 1,564,166 unvested RSUs and (ii) the implementation a new stock option program for executive officers and employees. The stock options granted pursuant to the program will have ten-year terms from the grant date, with one-half of the shares vesting on the grant date and the remaining one-half of the shares vesting on the first anniversary of the grant date. Please reference the Stock Options disclosure above.