Kaival Brands Innovations Group Inc (KAVL)

[BuyNStonks]

I like to think I'm pretty pragmatic about the stock.

Let me preface this by saying in the worst case scenario I do not envision an outcome where I don't walk away up 100%. With this outlook I'm more than happy to "see what happens." I am also biding time to get long term cap gains status.

This obviously colors my (and anyone else who finds themselves in a similar positions) opinion of the future. You need to make decisions based on your cost basis and risk tolerance.

Does KAVL have problems? Sure. What company doesn't?

My big list of gripes:

1) - Niraj and Eric playing both sides. I posted about my discontent with their compensation structure when their base salaries were raised. We have no idea what the margins are on the BIDI side of the equation. We have no idea if KAVL is getting a fair deal in negotiations or if BIDI receives an unfair advantage due to the arrangement. Due to this I believe they should be taking a $1 salary, growing the business, and benefiting from increased share price. I do not believe they should get a salary, RSUs and a cash payment for every $25M in gross revenue.

Solution: become more transparent about the relationship. The independent directors should hopefully alleviate some of these concerns as well.

2) - KAVL != BIDI - We do not know how the NASDAQ will respond to the current setup. KAVL is currently a middle man to a related party. One thing finance people look at is QUALITY of EARNINGS. While KAVL's revenue is generated from various different entities we only sell a single product currently. While our forecasts for revenue growth are fantastic there is real world risk associated with our revenue being earned in such a consolidated fashion. The abysmal 4Q is a self inflicted example of this. What if other supply chain issues occur outside of BIDI's control? NOTE: I have some real concerns about a label swap impacting production in such a significant manner but I don't care to speculate on this point.

Solution: Diversify our portfolio

3) - Class A Shares - Niaraj and Eric have what is essentially equivalent to 100% of KAVL's outstanding shares sitting in a different vehicle. Conversion is possible in 2023 or more likely when they hit $1B in gross revenues.

Solution: Retire the preferred shares to remove concerns about massive dilution. Convert them to another vehicle that retains voting power or put more concrete limitations in place on the Class A shares.

4) - Patent Purchase - The patents that we agreed to purchase appear to be utility/process patents around the manufacture/distillation of R/S nicotine. Niraj has made some pretty bold claims about modulating the ratios of the stereo isomers (R/S) and the resultant effect on addictive properties. I have not located any science to back this claim up.

Solution: None at the moment. Assuming Niraj is correct that addictive properties can be modulated.... a product that is "less addictive" or can be directly linked to aiding cessation will likely require FDA approval and take 5-10 years before we start to see revenue.

5) - $50M Public Offering - This was buried in the patent agreement. They may raise up to $50M at some point in the near future. They are cash positive so I would certainly like to know what $50M in capital will be used for. Maybe it is for R&D and maybe it is for M&A activity. Who knows. This isn't the end of the world. $50M @ $500M or $1B market cap is 10% and 5% respectively. It's not a huge diluting event. The possibility also exists for Kaival Holdings to do a private placement where the $50M in shares comes out of their piggy bank. I'm sure this option would cause plenty of grumblings but it wouldn't dilute us.....pick your poison.

6) - Reverse Split - Given where we are at I *think* I would like to let us bleed/suffer for a couple months and see where the price winds up. They have chosen another option. As others have said maybe they know something is coming down the pike that is dependent upon NASDAQ listing. I don't agree with the decision to force NASDAQ after 2 off quarters. I think we would be in a much stronger position if we did a R/S because we could only get to $3.50 after two strong quarters.

Even with all of the above gripes I still think the stock has room to run. I think $5-6 in today's price is still possible by the end of the year. Shit.... Based on the net income and revenue projections I had us pegged at $2.50 for end of 2021 during late fall/winter. It should be noted that I was extremely conservative when making this projection. As I mentioned on Stocktwits..... I think the run to $3+ got us all way to excited that we were going to reach the promised land much sooner than we anticipated. Now that we are coming back to reality it stings a little.