Office Space

We utilize the home office space and equipmentwarehouse of our management at no cost.

Note 6 - Concentration

Note 5 – Subsequent Events

Financial instruments, which potentially subject the Company to concentrations of credit risk, consist primarily of purchases of inventories, accounts payable, accounts receivable, and revenue.

Concentration of Purchases and Accounts Payable

Management has reviewed financial transactions forFor the Company subsequent to January 31, 2019 and has found that, withsix months ended April 30, 2020, 100% of the exceptioninventories of products , primarily consisting of the “Bidi Stick,” were purchased from Bidi, a contribution by Eric Mosser to the Companyrelated party, in the amount of $600$18,318,219. It also accounted for 100% of the total accounts payable as of April 30, 2020.

Concentration of Revenues and Accounts Receivable

For the six months ended April 30, 2020, approximately 36% of the revenue from the sale of products, primarily consisting of the “Bidi Stick,” was generated from Favs Business, LLC in the amount of $8,003,396.

Favs Business, LLC, Midwest Distribution, and GW Trading Inc. accounted for approximately 32%, 13%, and 11%, respectively, of the total accounts receivable as of April 30, 2020.

Note 7 – Income Tax

The Company is subject to federal income taxes and state income tax in the U.S. Significant judgment is required in determining the provision for income taxes and income tax assets and liabilities, including evaluating uncertainties in the application of accounting principles and complex tax laws.

The Tax Cuts and Jobs Act (the “Tax Act”) was enacted on April 14, 2019, which contributionDecember 22, 2017, and reduced the U.S. federal corporate tax rate from 35% to 21%, eliminated corporate Alternative Minimum Tax, modified rules for expensing capital investment, and limited the deduction of interest expense for certain companies. The Company fulfilled and shipped all of the Products from Florida and, thus, it is to be used for accounting expenses, there was nothing material to disclose.  This is considered to be a contributionsubject to the Companystate corporate income tax of Florida with no expectationa tax rate of repayment.4.458%.

During the six months ended April 30, 2020, the Company generated taxable income of $2,782,900 and, thus, accrued $784,000 of federal income tax and $166,432 of state income tax.

Significant components of the Company’s deferred tax assets and liabilities as of April 30, 2020 and October 31, 2019 after applying enacted corporate income tax rate, is net operating loss carryforward of $0 and $15,377, and a valuation allowance of $0 and $15,377, respectively, which is a total deferred tax asset of $0. The Company’s tax returns for 2018 and 2019 remain open to examination.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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 attached unaudited Financial Statements and notes thereto for the three and six months ended April 30, 2020 included under Item 1 – Financial Statements in this Quarterly Report and our Registration Statement on Form 10-12G, which contains audited Financial Statements and notes thereto for the periodyear ended October 31, 2018.2019 contained in our Annual Report on Form 10-K. 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 Quarterly Report regarding forward-looking statements.

The discussions of our results as presented in this Quarterly Report include use of the non-GAAP term “gross profit. Gross profit is determined by deducting the cost of goods sold from operating revenue. Cost of goods sold includes direct and indirect labor, materials, services, fixed costs, and variable overhead. Gross profit should not be considered an alternative to operating income or net income, which are determined in accordance with GAAP. We believe that gross profit, although a non-GAAP financial measure, is useful and meaningful to investors as a basis for making investment decisions. It provides investors with information that demonstrates our cost structure and provides funds for our total costs and expenses. We use gross profit in measuring the performance of our business. Other companies may calculate gross profit in a different manner.

Potential Impact of COVID-19

In March 2020, the WHO declared the outbreak of COVID-19 as a pandemic based on the rapid increase in global exposure. COVID-19 continues to spread throughout the world, including the United States. Our business operations, which commenced during this pandemic, continue to be operational and, to date, we have not seen any significant direct negative impact of COVID-19 to our newly commenced business. However, the COVID-19 pandemic continues to impact economic conditions, which could impact the short-term and long-term demand from our customers and, therefore, has the potential to negatively impact our results of operations, cash flows, and financial position in the future. Management is actively monitoring this situation and any impact on our financial condition, liquidity, and results of operations. However, given the daily evolution of the COVID-19 pandemic and the global responses to curb its spread, we are not presently able to estimate the effects of the COVID-19 pandemic on our future results of operations, financial condition, or liquidity for the remainder of fiscal year 2020 and, possibly, beyond.

Corporate History

We were incorporated on September 4, 2018 in the State of Delaware. We are focused on growing and incubating innovative and profitable products into mature, dominant brands.

USSE Corp. and USSE Delaware Merger

USSE Corp.Nevada was incorporated with the Nevada Secretary of State on July 8, 1998 under the original name C&A Restaurants. On June 15, 2009, C&A Restaurants changed its name to USSE Corp.

Effective September 19, 2018, USSE Corp.Nevada re-domiciled from Nevada to Delaware pursuant to a merger of USSE Corp.Nevada with and into USSE Delaware, with USSE Delaware as the surviving entity. Each share of USSE Corp.’s capital stock issued and outstanding immediately prior to the effective date of the Re-domestication Merger was automatically converted into one fully paid and nonassessable share of USSE Delaware.

Immediately following the Re-domestication Merger, USSE Delaware was authorized to issue up to 1,005,000,000 shares, which consisted of: (i) 1,000,000,000 shares of common stock, par value $0.001 per share, of which 66,397,574 shares were issued and outstanding at such date; and (ii) 5,000,000 shares of preferred stock, par value $.001 per share, of which (a) 1,000,000 shares were designated as Convertible Series A, all of which were issued and outstanding at that date; and (b) 500,000 shares were designated as Convertible Series B, of which 71,700 shares of Convertible Series B preferred stock were issued and outstanding at that date.

Holding Company Reorganization

On September 4, 2018, USSE Delaware acquired 1,000 shares of common stock of the Company, which represented 100% of the Company’s then-outstanding shares of common stock, for no consideration, resulting in the Company becoming a wholly-owned subsidiary of USSE Delaware. Also, immediately prior to the Holding Company Reorganization, USSE Merger Sub was ourthe Company’s wholly-owned subsidiary.

At the Effective Time, and in accordance with the provisions set forth in Section 251(g) of the DGCL, USSE Delaware, our then parent, merged with and into USSE Merger Sub, an indirect wholly-owned subsidiary of USSE Delaware and ourthe Company’s direct wholly-owned subsidiary, merged with and into USSE Delaware, asthe Company’s then parent. USSE Delaware was the surviving corporation and ourthe Company’s wholly-owned subsidiary. At the Effective Time, and as a result of the Holding Company Reorganization, the separate corporate existence of USSE Merger Sub ceased, and USSE Delaware also changed its name to USSE Corp., which then became following the our wholly-owned subsidiary. The Holding Company Reorganization also resulted in the conversion of securities of USSE Delaware into identical and equivalent securities of the Company and the stockholders of USSE Delaware became the stockholders of the Company.Reorganization.

Upon completion of the Holding Company Reorganization, by virtue of the merger, and without any action on the part of the holder thereof, each share of USSE Delaware’s common stock issued and outstanding immediately prior to the Effective Time of the Holding Company Reorganization was automatically converted into one validly issued, fully paid, and non-assessable share of the Company’s common stock. Additionally, each share of USSE Delaware’s preferred stock issued and outstanding immediately prior to the Effective Time was converted into one validly issued, fully paid, and non-assessable share of the Company’s preferred stock, having the same designations, rights, powers, and preferences, and the qualifications, limitation,limitations, and restrictions thereof, as the corresponding share of USSE Delaware’s preferred stock. Each share of the Company’s common stock issued and outstanding and held by USSE Delaware immediately prior to the Effective Time was cancelled.

Additionally, any shares held by the Company in the Predecessor were cancelled. This resulted in the Company being authorized to issue up to 1,005,000,000 shares, which consisted of: (i) 1,000,000,000 shares of common stock, par value $0.001 per share of which 66,397,574 shares were issued and outstanding; (ii) 5,000,000 shares of preferred stock, par value $0.001 per share, of which (a) 1,000,000 shares were designated as Convertible Series A, all of which were issued and outstanding; and (b) 500,000 shares were designated as Convertible Series B, of which 71,700 shares of Convertible Series B preferred stock were issued and outstanding.

Post-Holding Company Reorganization

On October 19, 2018, the Company issued 500,000,000 shares of restricted common stock and 400,000 shares of Convertible Series B preferred stockPreferred Stock to GMRZ for services rendered to the Company.

Commensurate with the filing of ourthe Company’s Amended and Restated Certificate of Incorporation with the Delaware Secretary of State on October 22, 2018, every issued and outstanding share of Convertible Series A preferred stock was converted into 1.25 shares of common stock with stockholders’shareholders’ economic rights preserved. Additionally, at the same time, every share of Convertible Series B preferred stock, issued and outstanding was converted into ten shares of common stock with stockholders’ economic rights adversely affected in the conversion. Immediately following the conversion of the aforementioned shares, and upon filing of the Amended and Restated Certificate of Incorporation, the authorized and unissued shares of Convertible Series A and Convertible Series B preferred stock were cancelled. As of October 22, 2018, the Convertible Series A and Series B preferred stock were removed from the status of authorized but unissued preferred stock.

On February 6, 2019, the Company entered into the non-binding Agreement, by and among the Company, GMRZ, and KBIG,KH, pursuant to which, on February 20, 2019, GMRZ sold 504,000,000 shares of the Company’s restricted common stock, representing approximately 88.06 percent of the Company’s issued and outstanding shares of common stock, to KBIG,KH, and KBIGKH paid GMRZ consideration in the amount set forth in the Agreement.Purchase Price. The consummation of the transactions contemplated by the Agreement resulted in a change in control of the Company, with KBIGKH becoming the Company’s largest controlling stockholder. The sole members of KBIG are Nirajkumar Patel and Eric Mosser.Mosser are members of KH. The Purchase Price was paid with personal funds of the members of KBIG.

KH.

ConcurrentlyEffective July 12, 2019, the Company changed its corporate name from Quick Start Holdings, Inc. to Kaival Brands Innovations Group, Inc. The name change was effected through a parent/subsidiary short-form merger of Kaival Brands Innovations Group, Inc., the Company’s wholly-owned Delaware subsidiary formed solely for the purpose of the name change, with and into the Company. The Company were the surviving entity.

On the effective date of the merger, the Company’s name was changed to “Kaival Brands Innovations Group, Inc.” and the Charter, was further amended to reflect the Company’s new legal name. There were no other changes to its Charter.

During the quarter ended April 30, 2020, the Company commenced business operations.

Our Business

Currently, we market and place the Products into national distribution channels through long-standing industry relationships in accordance with the closing ofA&R Distribution Agreement entered into with Bidi, a related party, in March 2020 (and subsequently amended and restated in May 2020. Pursuant to the transactions contemplated byA&R Distribution Agreement, we sell and resell the Agreement, on February 20, 2019, Mr. Paul Moody resigned asProducts to both retail level customers and non-retail level customers. Bidi’s primary product is the Company’s“Bidi Stick.” Bidi is considered a related party to us because our Chief Executive Officer, Chief Financial Officer, President, Secretary, Treasurer, and sole director. The resignation was not the result of any disagreement with the Company on any matter relating to its operations, policies, or practices.  On February 20, 2019,director, Mr. Nirajkumar Patel, was appointed as Chief Executive Officer, Chief Financial Officer, President, Treasurer,owns and director. There was no arrangement or understanding amongcontrols Bidi. Mr. Patel is also a beneficial owner of KH, the entity that is our largest controlling stockholder. Thus, Bidi and any other personwe are under common control.

Pursuant to the terms of the A&R Distribution Agreement, Bidi provides us with all branding, logos, and marketing materials to be utilized by us in connection with our marketing and promotion of the Products. We engaged QuikfillRx in March 2020 and, pursuant to the Service Agreement, QuikfillRx agreed to provide us with the Services, as we may request from time to time.

We process all sales made to retail customers and non-retail customers, with all sales to retail customers to be made through the website, www.bidivapor.com. We provide all customer service and support at our own expense. Bidi sets the minimum prices for all sales made by us. With respect to sales to non-retail customers, we submit purchase orders to Bidi, Bidi delivers the Products to us, and we ship the Products directly to these non-retail customers. In the case of retail customers, we maintain adequate inventory levels of the Products in order to meet these customers’ demand, and deliver the Products sold to these retail customers.

In connection with the A&R Distribution Agreement, we entered into the A&R Sub-Distribution Agreements with certain counterparties, pursuant to which he waswe appointed such counterparties as a director and officernon-exclusive sub-distributors of the Company. Also on February 20, 2019, Mr. Eric Mosser was appointed as Chief Operating Officer, Secretary, and director. There was no arrangement or understanding among Mr. Mosser and any other person, pursuantProducts to which he was appointed as a director and officernon-retail customers within the Territory. Each of the Company.

Business Overview

Since inception, the Company has been engaged in limited organizational efforts; however, the Company intends to commence business operations in the near term. Currently, the Company is exploring and evaluating various business opportunities, which may include entering into distribution or other contractual arrangements, or acquiring the assets of an existing company. As of the date of this Quarterly Report, the Company has not entered into any agreements concerning any business activities.

The Company, based on current and proposed business activities, is considered a “blank check” company. The SEC defines a “blank check” company as “any development stage company that is issuing a penny stock, within the meaning of Section 3(a)(51)-1 of the Exchange Act, and that has no specific business plan or purpose, or has indicated that its business plan is to engage in a merger or acquisition with an unidentified company or companies or other entity or person.” Pursuant to Rule 12b-2 promulgated under the Exchange Act, the Company also qualifies as a shell company, because it has no or nominal assets (other than cash) and no or nominal operations. In addition, many states have enacted statutes, rules, and regulations limiting the sale of securities of “blank check” companies in their respective jurisdictions.

In addition, the Company is an “emerging growth company” (“EGC”), that is exempt fromA&R Sub-Distribution Agreements set forth certain financial disclosure and governance requirements for up to five years as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), that eases restrictions on the sale of securities, and increases the number of stockholders a company must have before becoming subject to the SEC’s reporting and disclosure rules. We have elected to use the extended transition period for complying with new or revised accounting standards under Section 102(b)(2) of the Jobs Act, that allows us to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies. As a result of this election, our financial statements may not be comparable to companies that comply with public company effective dates.minimum purchase obligations.

We are currently exploring and evaluating business opportunities, which may include entering into distribution or other contractual arrangements or acquiringbelieve that over the assetscourse of an existing company. Our principal business objective for the next 12twelve months, and beyond such timeour business operations will begenerate the capital needed to achieve long-term growth potential through a combination with aour business or commencement ofobjectives; however, because we recently commenced business operations, rather than immediate, short-term earnings. We anticipate exploring potential business opportunities within the electronic cigarettes and vaporizers and CBD industries as a result of our management’s prior and current business experience within such industries. Management envisions that such business opportunities would result in us commencing business operations without having to otherwise consummate a business combination. We have not entered into any definitive agreements with any party; however, we have engaged in discussions with various parties regarding potential business opportunities.

In the event that management is unable to otherwise commence business operations, and determines that it is necessary to engage in one or more business combinations, we may consider a business that has recently commenced operations, is in need of additional funds for expansion into new products or markets, is seeking to develop a new product or service, or is an established business that maythere can be experiencing financial or operating difficulties and is in need of additional capital. Our management believes that the public company status that results from a combination with us could provide such company greater access to the capital markets, increase its visibility in the investment community, and offer the opportunity to utilize its stock to make acquisitions. However, there is no assurance that our business operations will continue to generate the cash flows required for us to achieve our business objectives. If we will have greater access to capital due to our public company status and, therefore, a business combination with an operating company in need ofrequire additional capital, may expose us to additional risks and challenges. In the alternative, a business combination may involve the acquisition of, or merger with, a company which does not need substantial additional capital, but which desires to establish a public trading market for its shares, while avoiding, among other things, the time delays, significant expense, and loss of voting control that may occur in a public offering. We do not anticipate paying a finder’s fee, either in cash or through the issuance of securities, for the consummation of any business acquisition the Company makes pursuant to its current business plan.

Any target business that is selected may be a financially unstable company or an entity in its early stages of development or growth, including entities without established records of sales or earnings. In that event, we will be subject to numerous risks inherent in the business and operations of financially unstable and early stage or potential emerging growth companies. In addition, we may commence business opportunities or combine with an entity in an industry characterized by a high level of risk, and, although our management will endeavor to evaluate the risks inherent in a particular target business, there can be no assurance that we will properly ascertainbe able to raise any required capital or assess all significant risks.

We intend to search for business opportunities by contacting various sources including, but not limited to, our affiliates, lenders, investment banking firms, private equity funds, financial advisors and similar persons, accounting firms, and attorneys notwithstanding us contacting any business directly. The approximate number of persons or entities that capital will be contacted is unknown and dependent on whether any opportunities are presentedavailable to us at acceptable terms, or at all. We believe that our cash provided by the sources that we contact. However, there is no assurance that weoperations will identify any viable business opportunities.

The risks we may face if we are unable to commence business operations, if such business operations are unsuccessful, if we are unable to acquire or merger with another entity, or if such acquisition or merger is unsuccessful, include, but are not limited to, difficulty in achieving future financing, continuing operations, bankruptcy, litigation, and increasing business operations on a limited or no budget.

We do not currently engage in any business activities that provide cash flow. The costs of investigating and analyzing business combinations and opportunitiesbe sufficient for the next 12 monthstwelve months.

As a result of the commencement of business operations, we have begun hiring employees and beyond such timeintend to hire additional independent contractors and/or employees in the future. We cannot provide any assurance as to the timing of the hiring of any additional independent contractors or employees, the number of independent contractors or employees that we may hire, and whether acceptable independent contractors or employees will be paid with money in our treasury, if any, or with additional amounts, as necessary,available to be loaned to or invested in us by our stockholders, management, or other investors. At this time, we are entirely reliant upon cash contributions made by our officers and directors to pay for any and all expenses.at that time.

During the next 12 months we anticipate incurring costs related to the filing of Exchange Act reports (legal, accounting, and auditing fees) in the amount of approximately between $5,000 and $10,000, or more. If we pursue any mergers or acquisitions, we anticipate incurring expenses of approximately between $10,000 and $20,000, or more, to pay for legal fees and audit fees. We believe we will be able to meet the costs of filing Exchange Act reports during the next 12 months through use of funds to be loaned to or invested in us by Mr. Nirajkumar Patel and Mr. Eric Mosser, our officers and directors, or other stockholders. However, there is no guarantee that such additional funds will be made available to us or on terms that are favorable to us. If we enter into a business combination with a target entity, we will attempt to require the target company to pay the acquisition related fees and expenses as a condition precedent to such an agreement.

To date,Historically, we have had no discussions with our officers and directors, Mr. Nirajkumar Patel and Mr. Eric Mosser, or other investors, regarding funding and no funding commitment for future expenses has been obtained. If in the future we need funds to pay expenses, we will consider these and other yet to be identified options for raising funds and/or paying expenses. Obviously, if Mr. Patel, Mr. Mosser, or other investors do not loan to or invest sufficient funds in us, then we will not be able to meet our SEC reporting obligations

We havea negative working capital, a stockholder deficit,no revenues, and have no source of revenues. Thesenegative cash flows from operating activities. In the past, these conditions raise substantial doubt about our ability to continue as a going concern. For the foreseeable future, we will be devoting our efforts to exploringour recently commenced business operations. However, we cannot provide any assurances that management’s plan with respect to our newly commenced business operations will be successful. At the time of filing this Quarterly Report, the previously reported going concern has been alleviated, and evaluating business opportunities, which may include merger or acquisition candidates. Ourmanagement does not have substantial doubt of the Company’s ability to continue as a going concern is dependent upon our ability. The unaudited financial statements filed as part of this Quarterly Report do not include any adjustments relating to develop additional sourcesthe recoverability and classification of capital, locaterecorded assets, or the amounts and completeclassification of liabilities that might be necessary in the event that we cannot continue as a merger with another company or otherwise commence business operations, and ultimately, achieve profitable operations.going concern.

Liquidity and Capital Resources

We have no known demands or commitments and are not aware of any events or uncertainties as of January 31, 2019April 30, 2020 that will result in or that are reasonably likely to materially increase or decrease our current liquidity.

AsAt April 30, 2020, we had working capital of January 31, 2019, the Company had no assets. The Company’s current liabilities as January 31, 2019 totaled $9,750, which consistedapproximately $2.8 million and total cash of accrued expenses.approximately $2.0 million.

The Company had noNow that we have commenced business operations, we intend to generally rely on cash flows from operating activities for the three months ended January 31, 2019. The Company has generated no revenues since inception. The Company is dependent upon the receipt of capital investment or other financing to fund its ongoing operations and equity and debt offerings, to execute its business plan. In addition, the Company is dependent upon certain related partiesextent necessary and available, to provide continued fundingsatisfy our liquidity needs. There are a number of 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 resources. If continued funding and capital resources are unavailablenot 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, may not be ablethe 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 implement its planweather any short-term impacts of operations. The Company can provide no assurance that it can continueCOVID-19; however, we are unable to satisfy its cash requirements for at least the next twelve months.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.

Cash Flows:

Cash flow provided by operations was approximately $2.0 million for the first six months of fiscal year 2020, compared to $0 for the first six months of fiscal year 2019. The increase in cash flow from operations for the first six months of fiscal year 2020 was mainly due to the increase in net income. We anticipate continued improvement in our cash flows provided by operations in future years based on the minimum purchase obligations set forth in the A&R Sub-Distribution Agreements, partially offset by increases in costs as we ramp up our sales and marketing efforts.

Results of Operations

The Company has not conducted any active operations since inception, except for its effortsThree months ended April 30, 2020, compared to identify suitable business opportunities. The Company has not generated any revenue from September 4, 2018 (inception), through January 31, 2019. It is unlikely that the Company will have any revenues unless it is able to identify suitable business opportunities and commence operations, of which there can be no assurance. Management believes that these circumstances may hinder the Company’s ability to continue as a going concern. The Company’s plan of operation for the next twelve months shall be to continue its efforts to locate suitable business opportunities.

For the three months ended January 31,April 30, 2019

Revenues:

Revenues for the Company had a net losssecond quarter of $13,960,fiscal year 2020 were approximately $22.5 million, compared to $0 in the same period of the prior fiscal year. During the second quarter of fiscal year 2020, we entered into the A&R Distribution Agreement, pursuant to which we were granted the exclusive, worldwide right to distribute the Products. In connection therewith, we entered into the A&R Sub-Distribution Agreements and other agreements with counterparties and granted such sub-distributors the right to distribute the Products to non-retail customers within the Territory.

Cost of Revenue and Gross Profit:

Gross profit in the second quarter of fiscal year 2020 was approximately $4.2 million, compared to $0 for the second quarter of fiscal year 2019. Total cost of revenue – related party was approximately $18.3 million for the second quarter of fiscal year 2020, compared to $0 for the second quarter of fiscal year 2019. The increase in gross profit is entirely driven by the commencement of sales of the Products during the second quarter of fiscal year 2020.

Operating Expenses:

Total operating expenses were approximately $458,000 for the second quarter of fiscal year 2020, compared to approximately $4,000 for the second quarter of fiscal year 2019. For the second quarter of fiscal year 2020, operating expenses consisted of advertising and promotion expenses of approximately $186,000, shipping expenses of approximately $74,000, and general and administrative expenses of approximately $198,000. Advertising and promotion expenses in the second quarter of fiscal year 2020 consisted primarily of the expenses incurred for marketing the Products and fees paid to QuikfillRx for the Services. General and administrative expenses in the second quarter of fiscal year 2020 consisted primarily of legal fees, salaries, merchant fees, and other service fees. Total operating expenses for the second quarter of fiscal 2019 consisted solely of general and administrative expenses.expenses, which were primarily from legal fees incurred. We expect future operating expenses to continue to increase while we generate increased sales growth.

Income Taxes:

During the second quarter of fiscal year 2020, we accrued approximately $950,000 for income taxes, compared to $0 for the second quarter of fiscal year 2019.

Net Income (Loss):

Net income for the second quarter of fiscal year 2020 was approximately $2.8 million, or $0.00 basic and diluted earnings per share, compared to net loss of approximately $4,000, or $0.00 basic and diluted loss per share, for the second quarter of fiscal year 2019. The increase in net income for the second quarter of fiscal year 2020, as compared to the second quarter of fiscal year 2019, is attributable to the commencement of sales of the Products.

Weighted-average common stock shares outstanding were 572,364,574 in the second quarters of fiscal year 2020 and fiscal year 2019.

Six months ended April 30, 2020, compared to six months ended April 30, 2019

Revenues:

Revenues for the first half of fiscal year 2020 was approximately $22.5 million, compared to $0 in the same period of the prior fiscal year. During the first half of fiscal year 2020, we entered into the A&R Distribution Agreement, pursuant to which we were granted the exclusive, worldwide right to distribute the Products. In connection therewith, we entered into the A&R Sub-Distribution Agreements and other agreements with counterparties and granted such sub-distributors the right to distribute the Products to non-retail customers within the Territory.

Cost of Revenue and Gross Profit:

Gross profit in the first half of fiscal year 2020 was approximately $4.2 million, compared to $0 for the first half of fiscal year 2019. Total cost of revenue – related party was approximately $18.3 million for the first half of fiscal year 2020, compared to $0 for the first half of fiscal year 2019. The increase in gross profit is entirely driven by the commencement of sales of the Products during the first half of fiscal year 2020.

Operating Expenses:

Total operating expenses were approximately $471,000 for the first half of fiscal year 2020, compared to approximately $18,000 for the first half of fiscal year 2019. For the first half of fiscal year 2020, operating expenses consisted of advertising and promotion expenses of approximately $186,000, shipping expenses of approximately $74,000, and general and administrative expenses of approximately $211,000. Advertising and promotion expenses in the first half of fiscal year 2020 consisted primarily of the expenses incurred for marketing the Products and fees paid to QuikfillRx for the Services. General and administrative expenses in the first half of fiscal year 2020 consisted primarily of legal fees, salaries, paid of bonuses, merchant fees, and other service fees. Total operating expenses for the first half of fiscal year 2019 consisted solely of general and administrative expenses, which were primarily from legal fees incurred. We expect future operating expenses to continue to increase while we generate increased sales growth.

Income Taxes:

During the first half of fiscal year 2020, we accrued approximately $950,000 for income taxes, compared to $0 for the first half of fiscal year 2019.

Net Income (Loss):

Net income for the first half of fiscal year 2020 was approximately $2.8 million, or $0.00 basic and diluted earnings per share, compared to net loss of approximately $18,000, $0.00 basic and diluted loss per share, for the first half of fiscal year 2019. The increase in net income for the first half of fiscal year 2020, as compared to the first half of fiscal year 2019, is attributable to the commencement of sales of the Products.

Weighted-average common stock shares outstanding were 572,364,574 in the first half of fiscal year 2020 and fiscal year 2019.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources that is material to investors.

Other than the policy changes disclosed in Note 2,Basis of Presentation and Significant Accounting Policies,to the unaudited Financial Statements in Item 1 of Part I of this Quarterly Report, there have been no material changes to our critical accounting policies and estimates during the six months ended April 30, 2020 from those disclosed in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K for the year ended October 31, 2019.

Recently Adopted Accounting Pronouncements

See Note 2,Basis of Presentation and Significant Accounting Policies, to the unaudited Financial Statements in Item 1 of Part I of this Quarterly Report for a description of recent accounting pronouncements and accounting changes.

Emerging Growth Company

AsWe are an EGC under“emerging growth company,” that is exempt from certain financial disclosure and governance requirements for up to five years as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). The JOBS Act eases restrictions on the Company hassale of securities and increases the number of stockholders a company must have before becoming subject to the Securities and Exchange Commission’s reporting and disclosure rules. We have elected to use the extended transition period for complying with new or revised accounting standards under Section 102(b)(1)(2) of the JOBS Act. This electionAct, that allows us to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies. As a result of ourthis election, our financial statements may not be comparable to companies that comply with public company effective dates.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide the information required by this Item.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of January 31, 2019,April 30, 2020, the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that because of material weakness in our internal control over financial reporting, our disclosure controls and procedures were not effective as of January 31, 2019.April 30, 2020.

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act, is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’sSEC’s rules and forms. Disclosure controls and procedures include, without limitations, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and our principal financial officer, to allow timely decisions regarding required disclosure.

Chances in Internal Control over Financial Reporting

During the fiscal quarter ended January 31, 2019,April 30, 2020, there was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II OTHER INFORMATION

Item 1. Legal Proceedings

There are no material pending legal proceedings as defined by Item 103 of Regulation S-K, to which we are a party or of which any of our property is the subject, other than ordinary routine litigation incidental to the Company’s business.

Item 1A. Risk Factors

As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide the information required by this Item.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

Amended and Restated Exclusive Distribution Agreement

None.On May 21, 2020, we entered into the A&R Distribution Agreement with Bidi, which amended and restated that certain Exclusive Distribution Agreement, dated March 9, 2020, previously entered into by Bidi and us. The A&R Distribution Agreement clarified certain provisions as to when risk of loss and title transfer to us, the shipping procedures for the Products purchased from Bidi, as well as other matters.

Amended and Restated Non-Exclusive Sub-Distribution Agreements

On May 21, 2020, we entered into an A&R Sub-Distribution Agreement with Favs Business, LLC (“Favs”), which amended and restated that certain Non-Exclusive Sub-Distribution Agreement, dated April 3, 2020, previously entered into by Favs and us. The A&R Sub-Distribution Agreement clarified certain provisions as to when risk of loss and title transfer with respect to the Products purchased by Favs, the shipping procedures for the Products purchased pursuant to the A&R Sub-Distribution Agreement, as well as other matters.

On May 26, 2020, we entered into an A&R Sub-Distribution Agreement with Colonial Wholesale Distributing, Inc. (“Colonial”), which amended and restated that certain Non-Exclusive Sub-Distribution Agreement, dated April 11, 2020, previously entered into by Colonial and us. The A&R Sub-Distribution Agreement clarified certain provisions as to when risk of loss and title transfer with respect to Products purchased by Colonial, the shipping procedures for the Products purchased pursuant to the A&R Sub-Distribution Agreement, as well as other matters.

The foregoing descriptions do not purport to be complete and are qualified in their entirety by the full text of such A&R Distribution Agreement and the A&R Sub-Distribution Agreements, which are filed as Exhibits 10.5, 10.6, and 10.7, respectively, to this Quarterly Report and is incorporated herein by reference.

Item 6. Exhibits

The following exhibits are filed herewith as a part of this report.

Quarterly Report.

*filed herewith

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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