Although Kaival Brands Innovations Group, Inc. (OTC Pink: KAVL) is trading off its 52-week highs, the good news is that the stock is starting to gain traction to the upside. In fact, since January, shares are higher by roughly 38%. Thus, while KAVL took a valuation hit similar to other vape and electronic nicotine delivery system stocks, this one appears to be on the mend. And its recently filed fiscal second-quarter 2021 report shows that KAVL is far from down and out.
In fact, as the exclusive global distributor of products manufactured by Bidi Vapor, LLC, including the BIDI® Stick disposable electronic nicotine delivery system (ENDS), KAVL is well on its way to building a potentially lucrative and new revenue stream heading into the back half of this year. Better still, they are also reporting substantial consignment-based revenue-growth.
On Monday, KAVL announced that it secured the largest single order in its history, an approximately $22.4 million order from Grocery Supply Warehouse, Inc., which supplies and services more than 25,000 retail stores. Better still, that deal has an aggregate total of $41.6 million when totaling the value from GSW and the $19.2 million from Lakshmi Distributor, Inc. Keep in mind, too, those orders add to an impressive $18.1 million in revenues generated during its fiscal second quarter ended April 30th. Indeed, it was a strong quarter of business despite massive pandemic-related headwinds.
The even better news going forward is that KAVL may have shifted momentum in its favor. And after receiving some of the most significant individual orders in its history, the company is well-positioned to leverage the revenue-generating strength from its robust pipeline and from the innovative BIDI® Stick as they shift focus toward servicing large wholesalers and distributors versus smaller retailers.
The new sales strategy serves a dual purpose. Both can build shareholder value.
The Trend Is The Friend
Part of the shift in strategy is to keep KAVL an industry leader while simultaneously adhering to and exceeding Prevent All Cigarette Trafficking (PACT) Act compliance requirements. It also allows them to market the BIDI® Stick experience, which satisfies its consumer base and returns a leading market share within the ENDS category to the company. And while the industry is down, it still delivers a more than $17 billion market opportunity in 2021 that is shifting into hyper-growth mode.
In fact, with the industry growing at a 22% compound annual growth rate, the ENDS market is expected to surge toward $32 million in the next four years. Thus, with the potential contract values of signing additional national retailers compared to its formerly focused on smaller retailers and wholesalers, KAVL believes that its strategic shift will deliver lucrative contracts and more of them over time.
Moreover, in addition to its new relationships, KAVL still benefits from its business with C-Store Master, which currently services Circle K stores nationwide and is said to be expanding its reach through several other major chains. Those deals keep the cash flow coming. And that's the lifeblood for business.
A Streamlined Sales Channel
Like every for-profit business, at the end of the day, cash flow is the source of survival. Kaival Brands, similar to other consumer products brands, recognizes revenue in two ways. Both are important in that they feed growth. Moreover, by structuring agreements to maximize that cash flow allows for more inventory turnover, better terms, and market expansion. Thus, it's always in KAVL's best interest to secure the most favorable payments and receivables terms. Besides keeping cash balances strong, the bigger effect is on how revenues get reported.
Typical payment terms call for KAVL to generally receive payment for its product shipment when the customer obtains control of the products. However, that's not always the case, which could affect how revenue gets reported. That's important to know since quarterly reports may not necessarily reflect the business making its way through the sales channel.
While COD payment is the gold standard, when dealing with major chains, KAVL offers payment terms, with most extending out to 120-days. Thus, in these types of orders, Kaival Brands fulfills and ships the entire product order upfront to the distributor and then receives payment for products upon sale by the wholesale or distributor payable monthly. Thus, with the payment cycle lasting up to 120-days, payment in full can take time. Still, that doesn't mean the money isn't coming. What it does do, however, is sometimes skew the quarterly results to make it appear as though the company might be underperforming on guidance.
For instance, its recent combined orders for $41.6 million were shipped with 120-day terms in April of this year. However, despite these orders being placed in the second quarter of fiscal 2021, GAAP accounting rules require that revenue recognition only be posted once the product sells or payment is received, since there can be no assurance sales happen. Thus, while KAVL expects to receive the entire invoice amount, it can be slow to accrue for reporting purposes—however, it's still a receivable that merits investor attention. And the excellent news is that while KAVL awaits its cash, it can benefit from similar terms that allow them to leverage terms and expand its market reach as well. That's already happening.
In fact, KAVL recently received approval to market and sell Bidi Vapor products in 11 countries, including Russia and countries in Europe. And while the pandemic pushed back the BIDI product launch in the U.K., the company expects to initiate that market soon. Obviously, the logistical hurdles faced by KAVL extended throughout the global distribution channels. Hence, while the planned buildout of its international infrastructure may have been delayed, recovering global consumer markets may allow them to bring the innovative BIDI® Stick to multiple international markets sooner rather than later. Obviously, that's their intent.
A Supporting Cast Of Products
Supporting additional market penetration, KAVL also expects to leverage the anticipated success of the BIDI® Stick to strengthen the market introduction of its BIDI® Pouch. Unfortunately, like other companies, and as noted, logistical and supply chain issues caused KAVL to delay that product launch. Still, as pandemic-related obstacles become less invasive, the company remains confident that the BIDI® Pouch will arrive on shelves in the coming months.
Hence, with KAVL optimistic about its future, coupled with meaningful consignment-based contracts in the market, its valuation may be missing the mark. Moreover, as KAVL continues the work to grow its business, they also remain focused on filing for and earning a listing on a more senior NASDAQ market. And with the company expecting approval and its shares potentially trading on the NASDAQ market in August, a near-term catalyst is in play. In fact, if KAVL can stay on target there, investors could expect a run-up before the new listing.
Thus, with KAVL stock consolidating at current levels, positive news could help send shares higher. But, of course, that's usually the case. And like other electronic nicotine delivery companies, KAVL is starting to attract investor attention. Moreover, while the industry suffered some early setbacks and a barrage of negative publicity, the truth of the matter is that the sector is exploding in market size.
And with that being the case, and to seize upon opportunities in the sector, it's best to act on investment propositions that have an apparent valuation disconnect. In more cases than not, finding those companies that have more intrinsic value than its share price represents often delivers the greatest near and long-term returns. And a simple sum of the parts exercise shows that KAVL may be more than undervalued, they may also be presenting a compelling long-term investment opportunity. Better still, as the ENDS industry grows, so should KAVL.
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