This 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
audited Financial Statements and notes thereto for the year ended October 31,
2022, included under Item 8 - Financial Statements and Supplementary Data in
this Report. 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 Report regarding forward-looking
statements.
We are focused on growing and incubating innovative and profitable products into
mature, dominant brands, with a current focus on the distribution of electronic
nicotine delivery systems ("ENDS"), also known as "e-cigarettes". Our business
plan is to diversify into distributing other delivery system products.
Our principal business activity is presently focused around our A&R Distribution
Agreement with Bidi, pursuant to which Bidi granted us an exclusive worldwide
right to distribute Bidi's ENDS as well as non-electronic nicotine delivery
systems and related componentsfor sale and resale to both retail level customers
and non-retail level customers. Currently, such products consist solely of the
"BIDI® Stick", Bidi's disposable, tamper resistant ENDS product made with
medical-grade components, a UL-certified battery and technology designed to
deliver a consistent vaping experience for adult smokers 21 and over. We
presently distribute products to wholesalers and retailers of ENDS products,
having ceased all direct-to-consumer sales in February 2021.
Potential Impact of COVID-19
In March 2020, the World Health Organization (the "WHO") announced a global
health emergency because of a new strain of coronavirus ("COVID-19") originating
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.
We were indirectly impacted by supply chain issues and regulatory oversight in
the fiscal year 2022. We believe that many retailers and distributers relaxed
their compliance standards as an indirect result of COVID-19 for two reasons:
(i) government enforcement of regulations was very limited due to imposed social
restrictions, resulting in less in-person monitor enforcement by government
officials and (ii) retail stores experienced light foot traffic from customers
due to COVID-19 restrictions and fears, which resulted in relaxed compliance in
an effort to generate additional revenue.
FDA PMTA Determinations, 11th Circuit Decision and Impact on Our Business
As the principal manufacturer of the products we distribute, Bidi's
interactions with FDA and related legal proceedings are of significant
importance to our business. Please see Item 1 - Business - FDA PMTA
Determinations, 11th Circuit Decision and Impact on Our Business for information
on this important topic.
Phillip Morris License Agreement
On June 13, 2022, we, through our wholly owned subsidiary, KBI, entered into the
PMI License Agreement with PMPSA, a wholly owned affiliate of PMI, for the
development and distribution of ENDS products in certain markets outside of the
United States, subject to market (or regulatory assessment). The PMI License
Agreement grants to PMPSA a license of certain intellectual property rights
relating to Bidi's ENDS device, known as the BIDI® Stick in the United States,
as well as potentially newly developed devices, to permit PMPSA to manufacture,
promote, sell, and distribute such ENDS device and newly developed devices, in
international markets, outside of the United States.
On July 25, 2022, we announced the launch of PMPSA's custom-branded
self-contained e-vapor product, pursuant to the licensing agreement. The
product, a self-contained e-vapor device, VEEBA, has been custom developed and
is now being distributed in Canada and in the United Kingdom, with additional
market launches planned this fiscal year.
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Reverse Stock Split
We effected the 1-for-12 Reverse Stock Split of our Common Stock on July 20,
2021. As a result of the Reverse Stock Split, every twelve (12) shares of our
pre-Reverse Stock Split Common Stock were combined and reclassed into one share
of our Common Stock. No fractional shares were issued in connection with the
Reverse Stock Split. Any fractional shares of Common Stock that would have
otherwise resulted from the Reverse Stock Split were rounded up to the nearest
whole number. In connection with the Reverse Stock Split, the Board approved
appropriate and proportional adjustments to all outstanding securities or other
rights convertible or exercisable into shares of Common Stock, including,
without limitation, all preferred stock, warrants, options, and other equity
compensation rights. All historical share and per-share amounts reflected
throughout our consolidated financial statements and other financial information
in this Report have been adjusted to reflect the Reverse Stock Split as if the
split occurred as of the earliest period presented. The par value per share of
the Common Stock was not affected by the Reverse Stock Split.
Going Concern
Our financial statements are prepared in accordance with U.S. GAAP applicable to
a going concern, which contemplates realization of assets and the satisfaction
of liabilities in the normal course of business within one year after the date
the consolidated financial statements are issued.
In accordance with Financial Accounting Standards Board (the "FASB"), Accounting
Standards Update ("ASU") No. 2014-15, Presentation of Financial Statements -
Going Concern (Subtopic 205-40), our management evaluates whether there are
conditions or events, considered in aggregate, that raise substantial doubt
about our ability to continue as a going concern within one year after the date
that the financial statements are issued. As shown in the accompanying
consolidated financial statements, the Company has incurred significant
recurring losses and negative cash flows from operations. These factors raised
substantial doubt about our ability to continue as a going concern.
In response to the above, we assessed our management's plans to alleviate that
doubt. We had positive working capital as of October 31, 2022 of $7.5 million.
We considered that our losses and negative cash flows were due to various
factors such as: (i) uncertainty surrounding the PMTA process with FDA and (ii)
the MDO that was issued to Bidi Vapor on its flavored ENDS product. However, the
MDO was set aside and remanded by the 11th Circuit and the ability to appeal
such decision has passed thereby facilitating the advancement of the flavored
BIDI® Sticks for sale in the United States (pending FDA's review of the flavored
PMTAs). Concurrently, the PMTA of the tobacco-flavored (Classic) BIDI® Sticks
for sale in the United States continues to move through scientific review
(pending FDA's review of that PMTA). Management's assessment included the
preparation of cash flow forecasts which considered increases in revenues
considering the favorable ruling obtained on the MDO as disclosed above.
We believe that our available cash and the cash to be provided by future
operating activities should enable us to meet our estimated liquidity needs for
the next 12 months after the date that the financial statements are issued.
Because of the above factors, we believe that this alleviates the substantial
doubt in connection with our ability to continue as a going concern.
However, there is no assurance that our plans will be achieve their desired
results due to the current economic climate in the United States and globally.
The accompanying consolidated financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of these uncertainties.
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Liquidity and Capital Resources
We believe we have sufficient cash on hand as of January 20, 2023. We had been
awaiting the outcome of Bidi's merit-based case pending in the Eleventh Circuit
Court of Appeals with respect to the MDO issued by the FDA in September 2021.
The Eleventh Circuit Court of Appeals finally ruled in favor of Bidi on August
23, 2022, so our business and financial condition will not be materially
adversely affected, including our ability to generate increased revenues from
sales of all Bidi stick flavors and our liquidity in Fiscal year ("FY") 2023 and
likely FY 2024 and beyond. Bidi's scientific study has now gone into review by
the FDA, which can take a considerable length of time, in which period allows us
to market and sell. Other than the ongoing PMTA reviews, we have no known
current demands or commitments and are not aware of any events or uncertainties
as of October 31, 2022 that will result in or that are reasonably likely to
materially increase or decrease our current requirements for cash and resulting
improved liquidity.
As of October 31, 2022, we had working capital of approximately $7.5 million and
total cash of approximately $3.7 million.
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 several 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. The Company was indirectly
impacted by supply chain issues and regulatory oversight. In FY 22 , the Company
believes that many retailers and distributers relaxed their compliance standards
as an indirect result of COVID-19 for two reasons: (i) government enforcement of
regulations was very limited due to imposed social restrictions, resulting in
less in-person monitor enforcement by government officials and (ii) retail
stores experienced light foot traffic from customers due to COVID-19
restrictions and fears, which resulted in relaxed compliance in an effort to
generate additional revenue.
We had also been impacted by Bidi's receipt of a MDO from the FDA. However, in
the fiscal fourth quarter of FY 2022 that MDO was eliminated for Bidi by the
Eleven Circuit Court of Appeals decision. For additional information regarding
the impact to our revenues during the last fiscal quarter of fiscal year 2022,
please see the section entitled "Revenues" below. At this time, we do not
foresee the need for further strategic financing for the next twelve months,
given the financing we completed in September 2021, as indicated below, other
working capital financing that will be available to us in FY 2022 and our
continual and increasing sales efforts and results.
In September 2021, we completed a firm commitment underwritten offering, which
offering was made pursuant to our Registration Statement on Form S-3 (File No.
333-258339) (the "Registration Statement"). The SEC declared the Registration
Statement effective on August 10, 2021. We sold 4,700,000 shares of our Common
Stock and warrants to purchase an additional 3,525,000 shares of our Common
Stock. We sold each share of our Common Stock and warrants to purchase 0.75
shares of our Common Stock at a combined public offering price of $1.90. We also
granted the underwriter the option to purchase an additional 705,000 shares of
our Common Stock and warrants to purchase an additional 528,750 shares of our
Common Stock. We received net proceeds from the offering of approximately $8.3
million. We have also received approximately $1.7 million from the exercise of
the warrants. We used the proceeds for general corporate purposes.
However, there is no assurance that our plans will be achieve their desired
results due to the current economic climate in the United States and globally.
The accompanying consolidated financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of these uncertainties.
Cash Flows:
Cash flow used in operations was approximately ($5.7) million for fiscal year
2022, compared to cash flow used in operations of approximately ($9.3) million
for fiscal year 2021. The decrease in cash flow used in operations for the
fiscal year 2022 was primarily due to the decrease in inventory purchases and
inventory deposits in the current year, partially offset by the decrease in
accounts payable - related party. We anticipate that our cash flows from
operations and sales in fiscal year 2023 will improve based on the minimum
purchase obligations set forth in the Sub-Distribution Agreements, partially
offset by minimal increases in costs as we ramp up our sales and marketing
efforts. Additionally, we are in the process of developing a working capital
line of credit with a third-party financial firm, which can supply us with
short-term cash needs as our customer growth requires many more orders of
product for interim short time intervals.
Cash flow provided by financing activities was approximately $1.6 million for
fiscal year 2022, compared to cash flow provided by financing activities of
approximately $9.7 for fiscal year 2021. The decrease in cash flow from
financing activities for the fiscal year 2022 was primarily due to the $8.3
million in net proceeds from the firm commitment underwritten offering in
September 2021, which consisted of shares of Common Stock and warrants to
purchase shares of Common Stock, and the approximately $1.7 million in cash
received from the exercise of warrants, offset by approximately $0.3 million,
which was the cash amount that was paid in connection with the withholding of
92,871 shares to satisfy tax obligations due upon such issuances to certain
employees.
27
Results of Operations
Year ended October 31, 2022, compared to year ended October 31, 2021
Revenues:
Revenues for fiscal year 2022 were approximately $12.8 million, compared to
approximately $58.8 million in the prior fiscal year. Revenues decreased in
fiscal year 2022, primarily in the first two fiscal quarters, generally due to
(i) increased competition, which we believe was the result of the lack of
enforcement by federal and state authorities against sub-par and low-priced
vaping products that continued to enter the market illegally without FDA
authorization and (ii) Bidi's receipt of the MDO, which limited our ability in
most of fiscal year 2022 to sell flavored BIDI® Sticks in the United States. On
August 23, 2022, the 11th Circuit set aside (i.e., vacated) the MDO issued to
the non-tobacco flavored BIDI® Sticks and remanded Bidi's PMTA back to the FDA
for further review. In light of the 11th Circuit decision, the Company
anticipates having the continued ability to market and sell the non-tobacco
flavored BIDI® Sticks, subject to FDA's enforcement discretion, for the duration
of the PMTA scientific review. We also anticipate that if the FDA begins
enforcement against illegally marketed or synthetic-nicotine vaping products,
there may be an increased demand for compliant and legal vaping products, such
as the BIDI®Stick.
Cost of Revenue and Gross Profit:
Gross profit in fiscal year 2022 was approximately $1.2 million, compared to
approximately $11.9 million for fiscal year 2021. Total cost of revenue was
approximately $11.5 million for fiscal year 2022, compared to approximately
$46.8 million for fiscal year 2021. The decrease in gross profit volume is
primarily driven by the downturn in sales of the Products, beginning in the
fiscal year 2021 and continuing through the end of fiscal year 2022, which was
primarily the result of the negative impact the PMTA and the impact the
regulatory landscape had on our business. Additionally, the cost of the
discounts, coupons and promotions programs, that we implemented in the third
quarter of fiscal year 2021 to assist in growing and retaining the customer base
and store shelf space, which continued through current year contributed a lower
gross profit margin per unit of Products sales, as these discounts, coupons and
promotions decreased our revenues.
Operating Expenses:
Total operating expenses were approximately $15.6 million for fiscal year 2022,
compared to approximately $22.4 million for fiscal year 2021. For the fiscal
year 2022, operating expenses consisted primarily of advertising and promotion
fees of approximately $2.7 million, stock option compensation expense of
approximately $6.0 million, professional fees of approximately $3.2 million,
salaries and wages of $1.7 million, and all other general and administrative
expenses of approximately $2.0 million. In fiscal year 2021, operating expenses
consisted of advertising and promotional expenses of approximately $3.2 million,
which included commissions paid to QuikfillRx pursuant to the Service Agreement
dated March 31, 2020, as amended on June 2, 2020 (the "Amended Service
Agreement"), and general and administrative expenses of approximately $10.2
million. General and administrative expenses in the fiscal year 2021 consisted
primarily of legal fees, salaries, professional fees, merchant fees, and other
service fees, and were necessary for our Reverse Stock Split process, the
process for the uplisting to Nasdaq, and to a lesser degree some of the indirect
costs incurred relating to our Common Stock and warrants offering in September
2021. Additionally, we incurred legal and other costs related to the FDA's
PMTA/MDO process for limiting the sales of flavored BIDI sticks. We expect
future operating expenses to increase while we generate increased sales growth
and invest in the Company's infrastructure to support the planned
business growth.
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Income Taxes:
We have Federal net operating loss ("NOL") carryforwards of approximately $12.3
million and state NOL carryforwards of approximately $85 thousand. With the
changes instituted by the CARES Act, the Federal NOLs have an indefinite life
and will not expire. Our federal and state tax returns for the 2020 and 2021
tax years generally remain subject to examination by U.S. and various state
authorities. A valuation allowance is recorded to reduce the deferred tax asset
if, based on the weight of the evidence, it is more likely than not that some
portion or all the deferred tax assets will not be realized. Management
determined that a valuation allowance of approximately $4.2 million for the year
ended on October 31, 2022, was necessary to reduce the deferred tax asset to the
amount that will more likely than not be realized.
Please refer to Note 7, Income Tax, in the Notes to the Consolidated Financial
Statements in this Report for additional information related to our income
taxes.
Net Income (Loss):
Net loss for fiscal year 2022 was approximately $(14.4) million, or $(0.36)
basic and diluted net loss per share, compared to a net loss of approximately
$(9.0) million, or $(0.38) basic and diluted net loss per share, for fiscal year
2021. The increase in net loss for the fiscal year 2022, as compared to net loss
in fiscal year 2021, is attributable to the revenues and expenses factors noted
above. Weighted-average common stock shares outstanding were 39,710,389 on
October 31, 2022, as compared to 24,000,246 on October 31, 2021. The increase in
the weighted-average shares in fiscal year 2022 was primarily attributable to
the conversion of 3,000,000 shares of Series A Convertible Preferred Stock to
25,000,000 shares of common stock and the exercise of 855,605 common stock
warrants issued in connection with our 2021 public underwritten offering.
Accrued Expenses:
During fiscal year 2022, we accrued approximately $33,900 for a quarterly bonus
and approximately $18,000 for approved expenses payable to QuikfillRx based on
our applicable gross quarterly sales for the three months ended October 31,
2022. During fiscal year 2021, we accrued approximately $3,800 for a quarterly
bonus and approximately $180,000 for a monthly retainer plus approved expenses
payable to QuikfillRx based on our applicable gross quarterly sales for the
three months ended October 31, 2021.
Excise taxes totaling approximately $6,600 were accrued based on taxable sales
during the fourth quarter of fiscal year 2022, compared to excise taxes of
approximately $2,200 that were accrued in fiscal year 2021 based on taxable
sales during the fourth quarter of fiscal year 2021.
Concentrations:
Financial instruments, which potentially subject us to concentrations of credit
risk, consist primarily of purchases of inventories, accounts payable, accounts
receivable, and revenue.
29
Concentration of Purchases and Accounts Payable- Related Party:
For the year ended October 31, 2022, 100% of the inventories of Products,
consisting solely of the BIDI® Stick, were purchased from Bidi, a related party
company that is owned by Nirajkumar Patel, our Chief Science and Regulatory
Officer and director, in the amount of approximately $1.5 million, as compared
to $61.9 million for the year ended October 31, 2021. There was no related party
accounts payable balance as of October 31, 2022. In fiscal year 2021, such
inventories accounted for 100% of the total related party accounts payable.
On April 29, 2022, our company and Bidi agreed to cancel the $2.9 million
inventory order paid in advance in fiscal year 2021 and this was a credit
against the accounts payable due to Bidi. Inventory quality control expenses
were paid by us on behalf of Bidi during the year ended October 31, 2022 in the
amount of approximately $0.7 million and were offset as a credit against the
existing accounts payable balance-related party. A credit of $2.9 million was
applied on August 1, 2022, resulting in a related-party receivable balance due
from Bidi of $2.1 million, to be applied on future orders of Product. On October
31, 2022, our company and Bidi agreed to a return for short-coded or expiring
inventory. An additional credit of $1.5 million and $108,000 for recycling costs
was applied on October 31, 2022, to the related-party receivable balance due
from Bidi.
As of October 31, 2022, we had a related-party receivable balance due from Bidi
of $3.7 million, in which $1.5 million of the receivable is classified as
current and $2.2 million is classified as non-current. The receivable balance
will be realized through Bidi applying 5% credits on all future orders of
Product until the entire balance is extinguished.
Concentration of Revenues and Accounts Receivable:
For the fiscal year 2022, (i) approximately 31% of the revenue from the sale of
Products, solely consisting of the BIDI® Stick, was generated from Favs Business
in the amount of approximately $3.9 million, (ii) approximately 15% of the
revenue from the sale of the Products was generated from H.T. Hackney Co. in the
amount of approximately $1.9 million, and (iii) approximately 12% of the revenue
from the sale of Products, solely consisting of the BIDI Stick, was generated
from GPM, in the amount of approximately $1.5 million. In Fiscal year 2021,
approximately 23% of the revenue from the sale of Products, solely consisting of
the BIDI® Stick, was generated from Favs Business in the amount of approximately
$13.9 million and approximately 16% of the revenue from the sale of the Products
was generated from MMS Distro in the amount of approximately $9.6 million.
Favs Business with an outstanding balance of approximately $375,000 and QuikTrip
Corporation, with an outstanding balance of approximately $85,000, accounted for
approximately 65% and 15% of the total accounts receivable from customers,
respectively, as of October 31, 2022. Favs Business with an outstanding balance
of approximately $1.0 million and C Store Master, with an outstanding balance of
approximately $322,000, accounted for approximately 50% and 16% of the total
accounts receivable from customers, respectively, as of October 31, 2021.
Cash and Restricted Cash
We consider all highly liquid investments with an original maturity of three
months or less when purchased to be cash equivalents. There were no cash
equivalents on October 31, 2022, or October 31, 2021. Cash and restricted cash
on October 31, 2022, and October 31, 2021, were $3.7 million and $7.8 million,
respectively.
Restricted cash consists of cash held short-term in escrow as required. As of
October 31, 2022, and October 31, 2021, we had $0 and $65,007 in restricted
cash, respectively, for amounts held in escrow.
30
Critical Accounting Policies and Estimates
Our financial statements are prepared in accordance with generally accepted
accounting principles in the United States, (or GAAP). The preparation of the
consolidated financial statements in conformity with GAAP requires our
management to make a number of estimates and assumptions relating to the
reported amounts of assets and liabilities, the disclosure or inclusion of
contingent assets and liabilities at the date of the consolidated financial
statements, and the reported amounts of revenue and expenses during the period.
We evaluate our significant estimates on an ongoing basis, including, but not
limited to, estimates related to allowance for doubtful accounts, and income tax
provisions. We base our estimates on historical experience and on various other
assumptions that we believe to be reasonable under the circumstances, the
results of which form the basis for making judgments about carrying value of
assets and liabilities that are not readily apparent from other sources. Actual
results could differ from those estimates.
We believe that the assumptions associated with our revenue recognition have the
greatest potential impact on our financial statements. Therefore, we consider
this to be our only critical accounting policy and we do not consider any of our
estimates to be critical accounting estimates.
However, we consider Revenue Recognition the most critical accounting policy for
the Company that could create a material misevaluation of Product Revenue if not
adhered to and implemented successfully. We adopted ASC 606, Revenue from
Contracts with Customers (Topic 606) ("ASC 606"), in the second quarter of
fiscal year 2020, as this was the first quarter that we generated revenues.
Under ASC 606, we recognize revenue when a customer obtains control of promised
goods, in an amount that reflects the consideration that we expect to receive in
exchange for the goods. To determine revenue recognition for arrangements within
the scope of ASC 606, we perform 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. We only apply 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.
Revenue Recognition Policy
Products Revenue
We generate product revenue from the sale of the Products (as defined above) to
non-retail customers. We recognize 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.
However, when we enter a consignment agreement with a new customer, once we ship
and deliver the requested amount of the Products the customer ordered to it
distribution center for its retail sales location, we retain ownership of the
delivered Products until they are delivered to their retail stores. When the
Products are sold in the stores and the funds, as stated in the consignment
agreement, are remitted to us, then we record the revenues in our financial
records. We determined that a customer obtains control of the Product upon
shipment when title of such product and risk of loss transfer to the customer.
Our shipping and handling costs are fulfillment costs, and such amounts are
classified as part of cost of sales. The advance payment is not considered a
significant financing component because the period between when we transfer a
promised good to a customer and when the customer pays for that good is short.
We offer credit sales arrangements to non-retail (or wholesale) customers and
monitor the collectability of each credit sale routinely.
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