Stockholders’ Equity

9 Months Ended

Jul. 31, 2023

Equity [Abstract]

Stockholders’ Equity

Note 8 – Stockholders’ Equity

Common Stock

During the nine months ended July 31, 2023, the Company issued 2,000,000 shares of Common Stock as consideration for the acquisition of the GoFire Purchased Assets. The Company also issued 92,000 shares of Common Stock as compensation for advisory services rendered in connection with the GoFire APA.   

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. 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.

Series B Convertible Preferred   Stock

The Company issued 900,000 shares of the Series B Preferred Stock as consideration for the acquisition of the GoFire Purchased Assets. The Series B Preferred Stock carries no voting rights except: (i) with respect to the ability of the holders of a majority of the then outstanding Series B Preferred Stock (the “Majority Holders”), to nominate a director to the Company’s board of directors, and (ii) that the vote of the Majority Holders is necessary for effecting any amendment to the Company’s Certificate of Incorporation or Certificate of Designation that affects the Series B Preferred Stock. The Series B Preferred Stock is redeemable at the option of the Company at a redemption price of $15 per share, subject to potential downward adjustments based on the trading price of the Common Stock. Subject to additional limitations in the GoFire APA, the Series B Preferred Stock holds seniority over the Common Stock and each other class of series of securities now existing or hereafter authorized with respect to dividend rights, the distribution of assets upon liquidation, and dissolution and redemption rights. Upon a liquidation and winding up of the Company, the holders of Series B Preferred Stock are entitled to a liquidation preference of $15 per share (the “Liquidation Preference”), though the redemption may be adjusted downward based on the trading price of the Common Stock at the time of liquidation. The holders of Series B Preferred Stock are entitled to receive a dividend equal to 2% of the Liquidation Preference, accruing from the Closing Date and payable on the eighteen-month anniversary of the Closing Date. No preemptive rights are granted to the holders of Series B Preferred Stock. The Majority Holders have the ability to cause a voluntary conversion of the Series B Preferred Stock into Common Stock at a conversion rate of 8.3333 shares of Common Stock per share of Series B Preferred Stock which may only occur on or after the following dates 18 month, 24 month, 36, month, 48 month, and 60 month anniversary of the original issuance date; and only up to 180,000 number of shares of Series B Preferred Stock on each of the these dates. All shares of Series B Preferred Stock will automatically convert to Common Stock upon the occurrence of a Change of Control (as defined in the GoFire APA).

Stock Options

Summary of stock options information is as follows:

									Weighted
	Aggregate			Aggregate			Exercise Price		Average
	Number			Exercise Price			Range		Exercise Price
Outstanding, October 31, 2022	3,202,265			8,921,419			1.03-28.68		2.79
Granted	5,325,000			4,754,250			0.61-0.99		0.89
Exercised	—			—			—		—
Cancelled, forfeited, or expired	(75,000	)		(154,500	)		2.06		2.06
Outstanding, July 31, 2023	8,452,265		$	13,521,169		$	0.61-28.68	$	1.60
Exercisable, July 31, 2023	3,777,265		$	9,041,544		$	0.99-28.68	$	2.39

During the nine months ended July 31, 2023, and 2022, the Company recognized $3,385,946 and $4,854,313, respectively of stock option expense related to outstanding stock options. As of July 31, 2023, the Company had $3,086,204 of unrecognized expenses related to outstanding stock options. The weighted average remaining contractual life is approximately 9.17 years for stock options outstanding as of   July 31, 2023. The aggregate intrinsic value of these outstanding options as of July 31, 2023, was $0. Compensation expense related to performance-based options is recognized on a straight-line basis over the requisite service period, provided that it is probable that performance conditions will be achieved, with probability assessed on a quarterly basis and any changes in expectations recognized as an adjustment to earnings in the period of the change. Compensation cost is not recognized for service- and performance-based awards that do not vest because service or performance conditions are not satisfied, and any previously recognized compensation cost is reversed. If vesting occurs prior to the end of the requisite service period, expense is accelerated and fully recognized through the vesting date.

On November 9, 2022, non-qualified stock options exercisable for up to 250,000 shares of Common Stock were awarded to one supplier of the Company. These stock options have an exercise price of $0.99 and a ten-year term from the grant date, with the shares fully vested on the issue date. The fair value of the options on the grant date was $246,747 using a Black-Scholes option pricing model with the following assumptions: stock price $0.9869 per share (based on the quoted trading price on the date of grant), a computed volatility of 275.68%, expected term of 10 years, and a risk-free interest rate of 4.12%.

On November 9, 2022, non-qualified stock options exercisable for up to 3,000,000 shares of Common Stock were awarded to one supplier of the Company. These stock options have an exercise price of $0.99 and a ten-year term from the grant date, with the shares fully vesting based on the achievement of certain net revenue and profit margin targets up to $180,000,000 in total net revenues over a period of 3 years. The fair value of the options on the grant date was $2,960,968 using a Black-Scholes option pricing model with the following assumptions: stock price $0.9869 per share (based on the quoted trading price on the date of grant), a computed volatility of 275.68%, expected term of 10 years, and a risk-free interest rate of 4.12%. Management determined the performance conditions were deemed probable on the grant date.

On February 6, 2023, non-qualified stock options exercisable for up to 150,000 shares of Common Stock were awarded to five employees of the Company. These stock options have an exercise price of $0.73 and a ten-year term from the grant date, with the shares fully vesting on February 6, 2024. The fair value of the options on the grant date was $109,499 using a Black-Scholes option pricing model with the following assumptions: stock price $0.73 per share (based on the quoted trading price on the date of grant), a computed volatility of 270.98%, expected term of 10 years, and a risk-free interest rate of 3.63%.

On February 6, 2023, non-qualified stock options exercisable for up to 1,000,000 shares of Common Stock were awarded to two senior executives of the Company. These stock options have an exercise price of $0.73 and a ten-year term from the grant date, with the shares fully vesting on February 6, 2024. The fair value of the options on the grant date was $729,988 using a Black-Scholes option pricing model with the following assumptions: stock price $0.73 per share (based on the quoted trading price on the date of grant), a computed volatility of 270.98%, expected term of 10 years, and a risk-free interest rate of 3.63%.

On February 6, 2023, non-qualified stock options exercisable for up to 375,000 shares of Common Stock were awarded to three independent board members of the Company. These stock options have an exercise price of $0.73 and a ten-year term from the grant date, with the shares fully vesting on February 6, 2024. The fair value of the options on the grant date was $273,747 using a Black-Scholes option pricing model with the following assumptions: stock price $0.73 per share (based on the quoted trading price on the date of grant), a computed volatility of 270.98%, expected term of 10 years, and a risk-free interest rate of 3.63%.

On February 6, 2023, non-qualified stock options exercisable for up to 200,000 shares of Common Stock were awarded to one consultant acting as a sales broker for the Company. These stock options have an exercise price of $0.73 and a ten-year term from the grant date, with the shares fully vesting based on the achievement of certain net revenue targets up to $100,000,000 in total net revenues over time to be generated from certain customers as listed in the sales broker agreement. The fair value of the options on the grant date was $145,998 using a Black-Scholes option pricing model with the following assumptions: stock price $0.73 per share (based on the quoted trading price on the date of grant), a computed volatility of 270.98%, expected term of 10 years, and a risk-free interest rate of 3.63%. Management determined the performance conditions were deemed not probable and as such no expense was recognized on these awards for the period ended July 31, 2023.

On March 3, 2023, non-qualified stock options exercisable for up to 50,000 shares of Common Stock were awarded to one interim senior executive of the Company. These stock options have an exercise price of $0.61 and a ten-year term from the grant date, with the shares fully vesting on June 30, 2023. The fair value of the options on the grant date was $30,650 using a Black-Scholes option pricing model with the following assumptions: stock price $0.61 per share (based on the quoted trading price on the date of grant), a computed volatility of 286.91%, expected term of 10 years, and a risk-free interest rate of 3.97%.

On March 19, 2023, non-qualified stock options exercisable for up to 250,000 shares of Common Stock were awarded to two independent board members of the Company. These stock options have an exercise price of $0.87 and a ten-year term from the grant date, with the shares fully vesting on March 19, 2024. The fair value of the options on the grant date was $217,498 using a Black-Scholes option pricing model with the following assumptions: stock price $0.87 per share (based on the quoted trading price on the date of grant), a computed volatility of 286.15%, expected term of 10 years, and a risk-free interest rate of 3.47%.

On July 8, 2023, incentive stock options exercisable for up to 50,000 shares of Common Stock were awarded to one employee of the Company. These stock options have an exercise price of $0.79 and a ten-year term from the grant date, with the shares fully vesting on July 8, 2027. The fair value of the options on the grant date was $39,409 using a Black-Scholes option pricing model with the following assumptions: stock price $0.79 per share (based on the quoted trading price on the date of grant), a computed volatility of 280.34%, expected term of 10 years, and a risk-free interest rate of 4.01%.

Warrants

Warrant information as of the periods indicated is as follows:

							Weighted
	Aggregate		Aggregate		Exercise Price		Average
	Number		Exercise Price		Range		Exercise Price
Outstanding, October 31, 2022	2,318,317		4,404,802		1.90		1.90
Granted	2,608,000		9,432,800		0.70 - 6.00		3.62
Exercised	—		—		—		—
Cancelled, forfeited, or expired	—		—		—		—
Outstanding, July 31, 2023	4,926,317	$	13,837,602	$	0.70 - 6.00	$	2.81
Exercisable, July 31, 2023	4,926,317	$	13,837,602	$	0.70 - 6.00	$	2.81

The weighted average remaining contractual life is approximately 3.64 years for Common Stock warrants outstanding as of July 31, 2023. As of July 31, 2023, there was no intrinsic value of outstanding stock warrants.

The Company issued a common stock purchase warrant to purchase an aggregate of 2,000,000 shares of Common Stock as consideration for the acquisition of the GoFire Purchased Assets. The Warrant is exercisable for a period of four (4) years from the Closing Date. The exercise price for the Warrant Shares is $3.00, $4.00, $5.00 and $6.00 per share, respectively, for each of four tranches of 500,000 Warrant Shares. The exercise prices of the Warrant are subject to customary stock-based (but not price-based) adjustments upon the occurrence of stock splits and the like involving the Common Stock. The Warrant is exercisable on a cash basis only, except that the Warrant may be exercised on a “cashless basis” if at the time of exercise there is not an effective registration statement under the Securities Act of 1933, as amended covering the public resale of the Warrant Shares.

The Company issued a common stock purchase warrant to purchase an aggregate of 368,000 shares of Common Stock as compensation for advisory services rendered directly related to the GoFire APA. The warrant is exercisable for a period of five (5) years from the Closing Date. The exercise price for the warrant shares is $0.70 per share. The warrant is non-exercisable or transferrable for six months after the date of the closing of APA other than as permitted by FINRA Rule 5110. The warrant may be exercised as to all or a lesser number of shares of Common Stock for a period of five (5) years after the Closing Date. The Company determined the fair value of the warrant as of the acquisition date and included it as part of the asset acquisition cost (see Note 4).

The Company entered into a financial advisor and placement agent agreement in April 2023 with an advisor. As part of the consideration for the advisor’s services, the Company will issue warrants to purchase an aggregate of 360,000 shares of Common Stock at an exercise price of $0.73 per share and a term of 5 years. During the twelve (12) month engagement period, the Company will grant the advisor warrants to purchase 30,000 shares of Common Stock each month. The Company issued the first six (6) months of warrants to purchase 180,000 shares of common stock upon the execution of the agreement and will issue monthly warrants each month at a rate of 30,000 warrants per month until 360,000 warrants have been issued in aggregate. For the three months ended July 31, 2023, the Company issued warrants to purchase a total of 240,000 shares of Common Stock. For the three months ended July 31, 2023, the Company recognized stock warrant expense of $141,816.

The Company determined the fair value of the warrants using the Black-Scholes option-pricing model with the following assumptions :

Expected term (years)	5
Expected volatility	243.20% - 247.90%
Risk-free interest rate	3.81% - 4.18%

The expected term represents the contractual term of the warrant. The expected volatility was based on the Company’s observed equity volatility over the period matching the term of the warrant. The assumed discount rate was the risk-free rate based on the rate of treasury securities with the same or similar term as warrant.